ECON 20 Lecture Notes - Lecture 22: French Wine, International Trade, Aggregate Demand

1 views3 pages
19 Oct 2020
Jeff Koo
Econ 20
Introductory Economics
Fall 2018
4 Units
International Trade
International trade consists of the export and import components of aggregate demand.
Exports are those goods and services produced domestically and sent to foreign countries.
Imports are all goods and services produced by foreign countries and consumed
domestically. Exports and Imports can be consumption goods/services or investment
capital. Remember that we subtract imports from the GDP equation because they are
included in the consumption or investment categories. For example, if you buy a bottle
of French wine, it is included in consumption, but then it must be subtracted from GDP in
1. Magnitude of International Trade
Over the last few decades, the U.S. economy has become more open, meaning there is
much more international trade. Exports as a share of GDP have grown from 4.3 percent
in 1970 to 12.8 percent in 2010. Imports have increased from 5.7 percent to 16.1 percent
over the same period. These figures indicate a multifold expansion of trade.
Yet, almost any other economy in the world is more “open” than the United
States. The unusual status of the U.S. stems from the sheer size of its economy
and population. Other countries depend even more heavily on international trade.
As pointed out above, the United States now imports substantially more than it exports.
When a country buys more abroad than it sells abroad, it is called a trade deficit.
The trade deficit has bounced up and down over the past 50 years. It was particularly
large in the middle 1980s. However, the trade deficit by 2006 was just under 6 percent of
GDP, is the biggest it has been in the last half century.
A trade deficit is not necessarily bad for an economy. Indeed, a trade deficit could be a
side effect of a good economy. In the two decades leading up to the Great Recession, the
United States has experienced a higher growth rate than the rest of the world. This means
that the United States is consuming more, and part of consumption will be in imports.
However, the other countries have not experienced the same growth and therefore
demand for U.S. exports has not grown as much as imports.
o What is the policy implication of this paradoxical side effect? The way to reduce
the trade deficit is to encourage trade partners to stimulate their economies, not to
enact domestic policies that would slow down the growth of the U.S. economy.
o During the Great Recession, the trade deficit shrank significantly. Weaker
economies in the U.S. and abroad led to reduced imports and reduced exports.
But the import drop was larger, reducing the trade deficit.
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