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Chapter 18 - 18.1 Introduction In this chapter we learn...

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6/23/2011 1 Chapter 18 International 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 fl ow of labor and capital across countries. – that the U.S. trade de fi cit 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.
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6/23/2011 2 For the world as a whole: – trade must be balanced because the world is a closed economy. t d d fi it i t i t b – 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 d th t f th d 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
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