chapter 8 - 167 The Export-Import Sector C hapter 8 T he...

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Unformatted text preview: 167 The Export-Import Sector C hapter 8 T he American economy is, by far, the largest and most productive in the world. Con- sequently, we are the world’s largest importer and exporter of goods and services. Yet foreign trade is less important to the U.S. economy than it is to those of nearly all other industrial nations. But in spite of the relatively small percentage of U.S. GDP accounted for through foreign trade, we have become thoroughly integrated into the global economy. So far we’ve looked at the three main sectors of GDP—C (consumption), I (invest- ment), and G (government spending). Now let’s consider X n (net exports). X n exports imports. CHAPTER OBJECTIVES In this chapter we’ll cover: • The basis for international trade. • U.S. imports and exports. • A summing up: C I G X n . • The world’s leading trading nations. • World trade agreements and free-trade zones. The Basis for International Trade If you follow baseball, then you’re familiar with trades. Let’s say that the Houston Astros have five right-handed hitting outfielders and trade one of them to the Philadelphia Phillies. In exchange the Phillies send the Astros one of their four left-handed relief pitch- ers. Baseball folk would say that that was a trade that helped both teams. Of course, why else would they trade? We’re going to look at trading, first between individuals, and then between nations. There are a lot of people who like to putter around the house, doing their own repairs. So how would you feel about doing a really big job, like building a 12 20 deck in your backyard? If you’re really good with tools, it might take you 60 hours from start to finish. Let’s say you’re a very successful attorney, who earns $300 an hour. Now you could hire a construction person or a carpenter to do the deck for you at $20 an hour. And to make things interesting, let’s say that this person will also need 60 hours to complete the deck. Question: Should you hire him or her or build the deck yourself? I’m sure that, unless you would rather do carpentry than anything else in the world, you would hire this person to build your deck. The labor will cost you $1,200. You could make $1,200 in just four hours by practicing law. sLa54774_ch08_167-182 12/02/03 19:19 Page 167 168 C H A P T E R 8 By the way, can you figure out the opportunity cost of building the deck yourself? It would be $18,000 (60 hours $300). So you would save yourself $16,800 (the $18,000 that you earned the $1,200 you paid the deckbuilder). If this sounds at all familiar, it may be because we talked about this in the section on specialization and exchange in Chapter 4. Back in 1776 Adam Smith made this observation: It is the maxim of every prudent master of a family, never to attempt to make at home what it will cost him more to make than to buy. The taylor does not attempt to make his own shoes, but buys them of the shoemaker. The shoemaker does not attempt to make his own clothes, but employs a taylor. The farmer attempts to make neither themake his own clothes, but employs a taylor....
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This note was uploaded on 02/09/2010 for the course ECON 201 taught by Professor C.liedholm during the Spring '07 term at Michigan State University.

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chapter 8 - 167 The Export-Import Sector C hapter 8 T he...

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