INTERNATIONAL TRADE THEORY
WHAT DOES THE UNITED STATES EXPORT AND IMPORT?
They were automobiles, computers, aircraft, corn, wheat, soybeans, scientific
instruments, coal and plastic materials
They were petroleum, automobiles, clothing, iron & steel, office machines, footwear,
fish, coffee and diamonds
WHY DO PEOPLE IN DIFFERENT COUNTRIES TRADE WITH ONE ANOTHER?
The reasons why we have international trade are the same as why we have any trade, at
Individuals trade to make themselves better off.
People trade with each other
because they both value something the other has more than they value some of their own
Different countries have different terrain, climate, resource, skills and so on.
that some countries will be able to produce some goods that other countries cannot
produce or can produce only at extremely high costs.
Bananas do not grow easily in the U.S. but they flourish in Honduras.
grow bananas if they used hot houses, but it is cheaper for Americans to buy bananas
from Hondurans than to produce bananas themselves.
HOW DO COUNTRIES KNOW TO TRADE?
To explain how countries know what to trade, we need to discuss the concepts of
Absolute Advantage and Comparative Advantage.
A country has an absolute advantage in the production of a good if using the same
amount of resources as another country, it can produce more of a particular good.
To put it differently, a country has an absolute advantage in the production of a good if,
with fewer resources, it can produce the same amount of a good as another country.