Lecture Economics (6/e): Chapter 8 - Stephen L. Slavin
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Chapter 8
The ExportImport Sector
Copyright 2002 by The McGrawHill Companies, Inc. All rights reserved.
81
Chapter Objectives
•
•
•
•
•
The basis for international trade
U. S. imports and exports
A summing up: C + I + G + Xn
The world’s leading trading nations
World trade agreements and freetrade
zones
Copyright 2002 by The McGrawHill Companies, Inc. All rights reserved.
82
The Basis for International Trade
• The basis for international trade is that a
nation can import a particular good or
service at a lower cost than if it were
produced domestically
– In other words, if you can buy it cheaper
than you can make it you buy it
– This maxim is true for individuals and
nations
Copyright 2002 by The McGrawHill Companies, Inc. All rights reserved.
83
Merchandise Imports and Exports as
Percentage of Goods Produced in the
United States, 19902000
Since 1990 our imports and
exports as a percentage of
goods produced in the United
States has grown steadily.
More than onequarter of all
the goods produced here are
shipped abroad, while our
imports are equal to about
onethird of the goods we
produce in the United States
Imports
Exports
1990
1992
Copyright 2002 by The McGrawHill Companies, Inc. All rights reserved.
1994
1996
1998
2000
84
Sum of U.S. Imports and Exports as
Percentage of GDP, 19702000
Between 1970 and
2000 the foreign trade
sector nearly tripled as
a percentage of GDP
1970 72
74
76
78
80
82
Copyright 2002 by The McGrawHill Companies, Inc. All rights reserved.
84
86
88
90
92
94
96
98 2000
85
U.S. Balance of Trade in Goods, Services, and
Overall Balance, 19702000 (in billions of dollars)
Balance
on services
Since the late 1980s, we
have been running a
large and growing
balance on services.
Our balance on goods,
which has been negative
since the mid1970s, has
grown steadily worse
since 1991 and now
totals more than $300
billion
Overall
balance
on goods
and services
Balance
on goods
1970
1975
1980
Copyright 2002 by The McGrawHill Companies, Inc. All rights reserved.
1985
1990
1995
2000
86
A Summing Up: C + I + G +
Xn
Net exports = Xn
Xn = Exports Imports
Copyright 2002 by The McGrawHill Companies, Inc. All rights reserved.
87
C + I + G + Xn
10,000
10,000
C+I+G
8,000
C+I+G
8,000
6,000
6,000
4,000
4,000
2,000
2,000
C + I + G + Xn
45û
45û
2,000
4,000
6,000
8,000
Disposable income ($)
10,000
2,000
4,000
6,000
8,000
Disposable income ($)
10,000
Why is the C + I + G + Xn line lower than the C + I + G line?
Answer: It is lower because net exports (Xn) are negative
Copyright 2002 by The McGrawHill Companies, Inc. All rights reserved.
88
Exports of Goods & Services as Percent
age of GDP, Selected Countries, 1999
Netherlands
60.6
Canada
43.7
Sweden
43.7
Switzerland
41.2
Denmark
36.8
Germany
France
26.1
United Kingdom
25.8
Italy
25.5
U.S.
0
29.5
10.7
10
20
30
40
50
Percentage of GDP
Copyright 2002 by The McGrawHill Companies, Inc. All rights reserved.
60
70
89
The World’s Top Ten Exporting
Nations, 1999
United States
683
Germany
520
Japan
388
Canada
358
China
214
South Korea
Mexico
133
118
Taiwan
110
Singapore
110
Switzerland
79
100
200
300
400
500
600
700
(billions of dollars)
Copyright 2002 by The McGrawHill Companies, Inc. All rights reserved.
810
World Trade Agreements and
Free Trade Zones
• The North American Free Trade
Association (NAFTA)
• The European Union (EU)
• The General Agreement on Trade and
Tariffs (GATT)
• The World Trade Organization (WTO)
Copyright 2002 by The McGrawHill Companies, Inc. All rights reserved.
811
The North American Free
Trade Agreement [NAFTA]
• NAFTA was ratified by Congress in 1993
• NAFTA created a free trade area including
Canada, the United States, and Mexico
– Trade barriers in industrial goods were dismantled
– Agreements on services, investment, intellectual
property rights, agriculture, and strengthening of
trades rules were included
– There were also side agreements on labor
adjustment provisions, protection of environment,
and import surges
Copyright 2002 by The McGrawHill Companies, Inc. All rights reserved.
812
The North American Free
Trade Agreement [NAFTA]
• How well has NAFTA worked?
– In late 1994, the United States trade surplus
with Mexico was up about 20 percent
– In early 1995, the full effects of the peso’s
fall turned this trade surplus into an annual
deficit of more than $15 billion
Copyright 2002 by The McGrawHill Companies, Inc. All rights reserved.
813
The North American Free
Trade Agreement [NAFTA]
• How well has NAFTA worked?
– Clearly, the threat of moving operations to
Mexico has had a depressing effect on
American factory wages
• Hourly wages and fringe benefits average about
$1.50 an hour in Mexico
– There is little evidence that the agreement
has cost more than 200,000 jobs
• This is less than 2 onethousandths of America’s
total employment
Copyright 2002 by The McGrawHill Companies, Inc. All rights reserved.
814
The European Union (EU)
Sweden
Denmark
Netherlands
Belgium
United Kingdom
Ireland
Finland
Germany
Luxembourg
Austria
Italy
Greece
France
Spain
Portugal
Indicates the 15 countries that
form the European Union (EU)
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815
The European Union (EU)
• This free trade association of 15 nations
was formed in 1992
– Freight is now able to move anywhere within
the EU without checkpoint delays and
paperwork
– Socalled quality codes were ended
– Workers from any EU country can work in
any other member country
Copyright 2002 by The McGrawHill Companies, Inc. All rights reserved.
816
The European Union (EU)
• In 1999, 11 EU countries formed the European
Monetary Union and the euro was
established as a common currency
• Initially, the euro existed along with each
country’s own currency
• In 2002 new euro coins and paper money
will begin to replace each country’s own
national currencies
– This common currency is expected to
make trade among participating
member nations much easier to
conduct
Copyright 2002 by The McGrawHill Companies, Inc. All rights reserved.
817
World Trade Agreements
• The General Agreement on Trade and Tariffs
(GATT) was drafted in 1947 and has since
been signed by more than 135 nations
• The latest version was ratified by
Congress in 1994
– GATT will
• Reduce tariffs by an average of 40%
• Lower other barriers to trade such as
quotas on certain products
• Provide patent protection for American
software, pharmaceuticals, and other
industries
Copyright 2002 by The McGrawHill Companies, Inc. All rights reserved.
818
World Trade Agreements
• Will GATT help or hurt the United
States?
– Although some industries will be affected
adversely, the positive appears to outweigh
the negative
• On average, foreign countries have more trade
restrictions and tariffs on U. S. goods than we
have on theirs
• GATT should help the U. S. more than it hurts
Copyright 2002 by The McGrawHill Companies, Inc. All rights reserved.
819
World Trade Agreements
• Will GATT help or hurt the United
States?
– GATT will, for the first time protect
intellectual property rights like patents,
trademarks, and copyrights
– GATT will also open markets for service
industries such as accounting, advertising,
computer services, and engineering
• These are fields in which Americans excel
Copyright 2002 by The McGrawHill Companies, Inc. All rights reserved.
820
World Trade Agreements
• Will GATT help or hurt the United
States?
– GATT brings agriculture under
international trade rules for the first time.
• European farm subsidies dwarf those paid to
American farmers
• Proportionally, the Europeans will will have to
reduce their subsidies a lot more than the United
States, making American crop exports even more
competitive
Copyright 2002 by The McGrawHill Companies, Inc. All rights reserved.
821
The World Trade Organization
(WTO)
• The WTO was set up in 1995 as a successor
to GATT
• The WTO is based on three major principles
– Liberalization of trade
– Nondiscrimination [the mostfavorednation
principle]
– No unfair encouragement of exports
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822
Liberalization of Trade
• Trade barriers, which were reduced
under GATT, should continue to be
reduced under the WTO
– Trade barriers have been falling within free
trade zones such as NAFTA and the
European Union
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823
Nondiscrimination
The MostFavoredNation Principle
• Under the mostfavorednation principle,
members of WTO must offer all its
members the same trade concessions as
any given member.
– This is a lot like when the teacher says that if
you bring candy to class, you must bring
some for everyone
Copyright 2002 by The McGrawHill Companies, Inc. All rights reserved.
824
No Unfair Encouragement of
Exports
• No unfair encouragement of exports
encompasses export subsidies, which are
considered a form of unfair competition
Copyright 2002 by The McGrawHill Companies, Inc. All rights reserved.
825
