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lecture notes for chapter 5 CHAPTER 5 INTERNATIONAL TRADE AND INVESTMENT 1. INTRODUCTION This chapter explores international trade in goods and services, examining its benefits, volume, and patterns. It also explores the main theories of why nations trade. 2. OVERVIEW OF INTERNATIONAL TRADE International trade is the purchase, sale, or exchange of goods and services across national borders. One way to measure the importance of trade is to examine the volume of an economy’s trade relative to total output (see Map 5.1). A. Benefits of International Trade Creates new entrepreneurial opportunities, expands the choice of goods and services, and creates jobs. The U.S. Department of Commerce estimates that for every $1 billion increase in exports, 22,800 U.S. jobs are created. B. Volume of International Trade World merchandise exports are $16 trillion and service exports are nearly $3.8 trillion. Trade in merchandise is around 80 percent of total trade; services, 20 percent. 1. Trade and World Output Slower world economic output slows international trade; higher output spurs trade. Trade slows in a recession as people are uncertain about the future and buy less. Also, when an economy is in recession, the currency is weak, slowing imports because they are more expensive. C. International Trade Patterns Trade volume and world output provide insight into the international trade environment but do not disclose trading partners. 1. Who trades with whom? a. Trade among the world’s high-income economies accounts for roughly 60 percent of total world merchandise trade. b. Two-way trade between high-income countries and low- and middle-income nations accounts for about 34 percent of world merchandise trade. c. Intra-regional trade accounts for around 70 percent of Europe’s exports, 56 percent of Asia’s exports, and less than 38 percent of North America’s exports. 2. Some economists call this century the “Pacific century,” referring to the expected future growth of Asian economies and the expected shift in trade flows from the Atlantic to the Pacific Ocean. D. Trade Dependence and Independence Countries lie on a scale, with total trade dependence at one end and total independence at the other. Complete independence was considered desirable from the sixteenth through eighteenth centuries, but is not desirable today. 1. Effect on Developing and Transition Nations Developing and transition nations often depend on their developed neighbors with whom they share borders. Germany is the single most important trading partner of central and eastern European nations. 2. Dangers of Trade Dependency
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If a nation experiences economic recession or political turmoil, the dependent nation can experience economic problems. Trade today is characterized by a certain degree of interdependency, which often reflects trade between a company’s subsidiaries .
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