Chapter 18 - 6/23/2011 1 Chapter 18 International Trade...

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Unformatted text preview: 6/23/2011 1 Chapter 18 International Trade Trade Charles I. Jones 18.1 Introduction • In this chapter, we learn: – why countries trade goods and services – why such trade can increase welfare. – the roles of comparative advantage and risk- sharing in explaining trade between countries sharing in explaining trade between countries. – the relationship between trade and the free flow of labor and capital across countries. – that the U.S. trade deficit represents borrowing by the U.S. economy from the rest of the world, which must be repaid in the future. • The United States is running a large trade deficit – Exceeds 5 percent of GDP • The twin deficits – the trade deficit – the government budget deficit 18.2 Some Basic Facts about Trade • Imports and exports have been rising as a share of GDP over the last 50 years – because of declines in transportation costs t i across countries. – Countries have also reduced tariffs and quotas. • The trade balance – net exports, or the difference between exports and imports. 6/23/2011 2 • For the world as a whole: – trade must be balanced because the world is a closed economy. – trade deficits in some countries must be offset by trade surpluses in other countries. 18.3 A Basic Reason for Trade • United States – someone else produces most of the goods an individual consumes. The Robinson Crusoe economy • The Robinson Crusoe economy – each person produces all the goods he or she consumes. – inferior way of organizing an economy. • The motivation for international trade – same as the reason for trade within a country. – People value goods that other people produce more than they value what they themselves own – Individuals and countries can realize gains from trade. 18.4 Trade across Time • Trade is balanced if – neither economy is running a trade surplus or deficit. • Shocks such as a natural disaster may reduce the amount of the goods produced in an economy – However, individuals wish to smooth consumption over time – Countries could trade over time to neutralize the impact of shocks 6/23/2011 3 • Intertemporal trade: – trade over time – countries running trade surplus in good times – counties running trade deficits in bad times. – allows for risk-sharing: economies trade to neutralize the impact of unanticipated shocks. • In the long run: – trade must be balanced – Country budget constraint: the present discounted value of the trade balance must equal zero. • Trade deficit – Net exports negative – domestic uses of goods and services exceeds production • Recall the national income identity: • Rearranging, • When a country is running a trade deficit, – net exports are negative – Domestic uses of goods and services exceeds production • When a country is running a trade surplus, – net exports are positive – some of what is produced is not used up by domestic uses and can be shipped abroad • A country can run a trade deficit...
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This note was uploaded on 08/23/2011 for the course ECON 3203 taught by Professor Robertpennington during the Summer '11 term at University of Central Florida.

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Chapter 18 - 6/23/2011 1 Chapter 18 International Trade...

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