Comparative Advantage and International Trade

Goods and services purchased from other countries are imports; goods and services sold to other countries are exports.

The United States buys smartphones—and many other goods and services—from other countries. At the same time, it sells many goods and services to other countries. Goods and services purchased from abroad are imports; goods and services sold abroad are exports.

As illustrated by the opening story, imports and exports have taken on an increasingly important role in the U.S. economy. Over the last 50 years, both imports into and exports from the United States have grown faster than the U.S. economy. Panel (a) of Figure 8-1 shows how the values of U.S. imports and exports have grown as a percentage of gross domestic product (GDP). Panel (b) shows imports and exports as a percentage of GDP for a number of countries. It shows that foreign trade is significantly more important for many other countries than it is for the United States. (Japan is the exception.)

The Growing Importance of International Trade Panel (a) illustrates the fact that over the past 50 years, the United States has exported a steadily growing share of its GDP to other countries and imported a growing share of what it consumes. Panel (b) demonstrates that international trade is significantly more important to many other countries than it is to the United States, with the exception of Japan.
Sources: Bureau of Economic Analysis [panel (a)] and World Development Indicators [panel (b)].

Globalization is the phenomenon of growing economic linkages among countries.

Hyperglobalization is the phenomenon of extremely high levels of international trade.

Foreign trade isn’t the only way countries interact economically. In the modern world, investors from one country often invest funds in another nation; many companies are multinational, with subsidiaries operating in several countries; and a growing number of individuals work in a country different from the one in which they were born. The growth of all these forms of economic linkages among countries is often called globalization. And as we saw in the opening story, certain sectors of the economy are characterized by extremely high levels of international trade. This hyperglobalization is often the result of supply chains of production that span the globe, in which each stage of a good’s production takes place in a different country—all made possible by advances in communication and transportation technology. (We analyze a real-life example in this chapter’s business case.)

In this chapter, however, we’ll focus mainly on international trade. To understand why international trade occurs and why economists believe it is beneficial to the economy, we will first review the concept of comparative advantage.