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The purpose of the international trade lesson is to provide the most recent data on international trade, interpretations of trends and causes of changes in trade deficits and surpluses, and a number of relevant student and classroom activities.

KEY CONCEPTS

Exchange Rate, Exports, Imports

Current Key Economic Indicators

as of November 10, 2014

Inflation

The Consumer Price Index for All Urban Consumers increased 0.1 percent in October on a seasonally adjusted basis. The core inflation rate increased the same amount. For the previous 12 months, the index increased 1.7%, the same rate as reported in the September report.

Employment and Unemployment

According to the October report of the Bureau of Labor Statistics, the unemployment rate fell from 5.9% to 5.8%, and the number of individuals unemployed also decreased. Total nonfarm employment rose by 214,000 in October. Employment gains were concentrated in retail trade, food services and health care.

Real GDP

The advance estimate for real GDP growth in the third quarter of 2014 was 3.5%, a decrease from the revised second quarter growth of 4.6%. Inventory investment reduced third quarter growth, while it added to second quarter growth. In addition, consumer spending increased at a lower rate in the third quarter, compared to the second. Finally, business investment increased in the third quarter, but at a lower rate than in the second quarter.

Federal Reserve

The FOMC believes that the labor market has shown considerable improvement and the risks of inflation rising above its 2% target are low. Therefore, the Federal Reserve announced plans to end its purchase of financial assets. In addition, the federal funds rate will remain at its current low level. However, the FOMC has signaled its willingness to increase the federal funds rate if inflation shows signs of rising above the 2% target.


Announcement

The U.S. international trade deficit in goods and services decreased by $2.1 billion to $27.1 billion in August from $29.2 billion in July as imports decreased (-$1.2 b) and exports increased ($0.9 b).

Goals of the International Trade Case Study

The purpose of the international trade case study is to provide the most recent data on international trade, interpretations of trends and causes of changes in trade deficits and surpluses, and a number of relevant student and classroom activities.

Note to the Teacher

This lesson uses many charts and tables. You may use these files to create student reproducables or overhead transparencies for use in your classroom.

Data Trends

The trade deficit (exports minus imports) increased rapidly from March 1998 to September of 2000. From September 2000 to March 2001, the trade deficit remained relatively stable around $33 billion. Since March, imports have fallen more rapidly than exports, causing the trade deficit to decrease from $33 billion to 27.1 billion.

Figure 1: Monthly Balance of Trade in Goods and Services

Exports and imports in dollar terms have been increasing for the last 30 years. Exports and imports as percentages of GDP have been increasing throughout most of those years. As percentages of GDP, exports and imports rose rapidly in the 1970s, leveled off in the 1980s, and began to rise again in the 1990s. The trade deficit, as a percentage of GDP, increased dramatically in the 1980s, shrank in the late 1980s and early 1990s, then began to rise again in the late 1990s. Over the last several years, imports have continued to rise as a percentage of GDP and exports have fallen.

Figure 2: Exports and Imports of Goods and Services (Annual GDP 1970-2000)

Figure 3: Exports and Imports of Goods and Services as a Percentage of GDP (1970 - 2000)

Components of International Trade

The United States imports and exports both goods and services.

Figure 4: A breakdown of Exports and Imports by Goods and Services

As shown in the graph above, currently goods account for 70 percent of our exports and 84 percent our imports.

Services account for 30 percent of our exports and 16 percent of our imports.

The major categories of goods imported and exported are:

  • Capital goods (aircraft, semiconductors, computer accessories, machinery, engines)
  • Vehicle parts and engines
  • Industrial materials and supplies (metals, energy, plastics, textiles, lumber)
  • Consumer goods (pharmaceuticals, apparel, toys, TV/VCRs, furniture, gem stones)
  • Food, feed, and beverages.

Their relative contributions to U.S. exports and imports are illustrated in the two pie charts below.

Figure 5A: Components of Exported Goods and Services (2000 Annual Data)

Figure 5B: Componenets of Imported Goods and Service (2000 Annual Data)

In 2000, the United States exported more capital goods than we imported. Food, feed, and beverages exported and imported were about the same. But in automotive products, consumer goods, and industrial supplies, we imported significantly more than we exported. Some of the largest components of exports include: semiconductors (7.6%), computers and accessories (7.1%), and aircraft and parts (6.2%). Some of the largest components of imports include: crude oil (7.4%), computers and accessories (7.4%) and clothing and textiles (4.9%).

The main categories of services include travel, fares, transportation, and royalties/license fees.

  • Travel: Goods and services purchased by international visitors to the United States and U.S. citizens who are traveling abroad (food, lodging, recreation, gifts). (29% of exports, 31% of imports)
  • Passenger fares: The transportation expenditures of people from the United States traveling abroad and individuals from other countries traveling to the United States (primarily airfare). (8% of exports, 11% of imports)
  • Transportation: The transportation costs for goods moved by ocean, air, pipeline, and railway to and from the United States (10% of exports, 19% of imports)
  • Royalties and license fees: Fees for patents, copyrights, and trademarks. (13% of exports, 7% of imports)
  • Other: Government, defense and private services.

Changes in Imports and Exports of Goods and Services

Changes in Exports for August (in Billions)
Category   Change   Total

Exports   $0.9   $84.5

 Goods

  $0.8   $59.5

  Capital Goods

  -$0.6    
  Automotive...   $0.5    
  Consumer Goods   -$0.2    
  Industrial Supplies   $0.5    
  Food, Feed, Bev.   $0.2    
  Other goods...   $0.1    
Services   $0.1   $25.0
Changes in Imports for August(in Billions)
Category   Change   Total

Imports   -$1.2   $111.6
 Goods   -$1.2   $93.3
  Capital Goods   -$0.4    
  Automotive...   $0.6    
  Consumer Goods   -$0.3    
  Industrial Supplies   -$0.9    
  Food, Feed, Bev.   -$0.1    
  Other goods...   -$0.2    
Services   $0.1   $18.2


The increase in exports was due mostly to a decrease in goods exported. The U.S. exported more industrial supplies and materials, automotive vehicles part and engines, foods, feeds and beverages and 'other goods,' while decreases occurred for capital goods and consumer goods. The increase in services exported was due to increases in travel and passenger fares.

The decrease in imports occurred due to a decrease in goods imported. The U.S. imported more automotive vehicles, parts and engines, but decreased imports in all other sectors. Services increased in most categories.

International Trading Partners

Figure 6: The Major Trading Partners of the U.S. in Goods for 2000

The graph above shows what percentages of United States imported goods come from each of our major trading partners and the percentage of our exported goods going to those same countries. These are percentages of United States exports and imports and do not necessarily represent a trade surplus or deficit. The United States currently has a trade deficit for manufactured goods with all of the countries listed above except for the Netherlands.

The Effects of Price Levels and Changes in Real GDP on Exports and Imports

Exports and imports are influenced by a variety of factors. Increases in income in the United States will increase the demand for all goods and services, including those that are imported. Thus, imports will rise as incomes increase. Increases in income in other countries have a positive effect on our exports. Decreases in income here cause exports to fall. Decreases in income among our trading partners cause our exports to fall.

Changes in prices here and abroad are also important. If we experience more inflation here than the rest of the world is experiencing, our goods cost more and thus our imports will rise and exports will fall. The reverse is true if the rest of the world experiences a greater rate of inflation than we do in the United States.

Changes in tastes will also affect import and export levels. If U.S. residents consume more fruit and vegetables, imports will increase. As the rest of the world finds U.S. software and airplanes more attractive, our exports will rise.

Changes in exchange rates influence exports and imports. Exchange rates are the prices at which currencies are exchanged. For example, one U.S. dollar can buy (or be exchanged for) approximately 10 Mexican pesos in international currency markets. Or, one Mexican peso costs about 10 cents. Most exchange rates are determined in open markets, and the rates depend upon the supply and demand for each currency.

If the international value (price) of the dollar increases (say from 10 pesos per dollar to 12 pesos per dollar), U.S. goods become more expensive for Mexicans and goods from Mexico become cheaper for people in the United States. Before the increase in the international value of the dollar, automobiles costing $20,000 in the United States cost an individual in Mexico 200,000 pesos ($20,000 times 10 pesos per dollar). After the change in the value of the dollar, the same car will cost will cost someone in Mexico 240,000 pesos ($20,000 times 12 pesos per dollar). Thus, Mexicans will purchase fewer U.S. cars.

At the same time, Mexican goods become less expensive for people in the United States. For example, a Mexican vacation stay that costs 40,000 pesos formerly cost someone from the United States $ 4,000 (40,000 pesos times $.10 per peso). Now, the vacation is cheaper for the United States as the cost of a peso falls from $ .10 to $ .083 (40,000 pesos times $ .083 per peso = $ 3,320).

The Cause of Trade Deficits

One of the more difficult macroeconomic concepts is the determination of trade deficits or surpluses. If exchange rates fluctuate with the international supply and demand for a currency and if there are free flows of capital and goods, the relation of saving and investment in an economy determines the balance of trade in economies. For example, if saving (of all forms - personal, corporate, and government) is less than the amount of investment spending in an economy, there will tend to be upward pressure on interest rates (actually real interest rates). Those increases will tend to increase the international demand for the domestic currency. That increased demand will cause the international value of the currency to increase. In turn, the rise in the international value of the currency will make the country's exports more expensive for those abroad and thus exports will decrease. The country's imports will be less expensive and thus imports will increase. The result of the increase in imports and fall in exports will be a rising trade deficit (or a falling trade surplus).

In the current context of a falling trade deficit, the explanation is exactly the opposite. The danger in asserting that cause with a great deal of confidence is that the fall in the deficit is for a single month and is likely to be revised.

Questions for Students

  1. What does it mean if a country has a balance of trade that is zero?

    [It means that imports exactly equal exports.]

  2. How can a country receive more goods and services from abroad than it sends in return?

    [If the United States imports more than it exports, the rest of the world will end up with more dollars. (The United States will have paid out more dollars for its imports, than it received back for its exports.) If institutions and individuals in other countries want to use those dollars to make investments in the United States, the value of the dollar will not change. If those dollars are not desired, there will be a surplus of dollars on the international market and the value of the dollar will fall. That will result in a reduction in imports and an increase in exports.]
     
  3. If the growth in spending in U.S. economy is slowing, what will be the likely effect on imports? Explain why. If the growth in spending is more rapid in the U.S. than the rest of the world, what will be the likely effect on net exports?

    [If growth in U.S. spending is slowing, spending on imports will not grow more slowly. In addition, if that slowing growth in U.S. spending is causing less inflationary pressure, U.S. goods may become relatively cheaper and more people will buy domestic goods and fewer imported goods. If growth in the United States is accelerating, the opposite result will be true.]

  4. If inflation is higher in the United States than in countries with which the United States trades, what will likely happen to U.S. net exports? Why?

    [If growth in U.S. spending is slowing, spending on imports will not grow more slowly. In addition, if that slowing growth in U.S. spending is causing less inflationary pressure, U.S. goods may become relatively cheaper and more people will buy domestic goods and fewer imported goods. If growth in the United States is accelerating, the opposite result will be true.]

  5. Why would a country want to place tariffs and quotas on imported goods?

    [Tariffs are taxes placed on imported goods. Quotas are restrictions on the quantities of specific types of goods that can be imported. In both cases, the goal is usually to restrict imports and thereby protect a domestic industry from competition. While an industry and its employees and owners may benefit, the entire economy is likely to be worse off as a result. Less competition and less trade means that consumer well-being will be reduced.]