Chapter 1

An Introduction to International Trade

This chapter provides an overview to the study of international economics and to the material covered
in this textbook. It offers an extensive discussion of real world data on the characteristics of the various
countries of the world, including their standards of living and the importance of international trade to their
economies. It also discusses various aspects of the nature of international trade in today’s world such as
the commodity composition of international trade and the direction of international trade flows.

The book includes considerable amounts of data, especially in this chapter. Students should be encouraged
to peruse this data—perhaps by challenging them to discover “interesting facts” or by giving them an
international trade IQ test—including questions such as which country is the world’s largest exporter, etc.
The chapter previews the Heckscher-Ohlin theory of trade flows in its discussion of U.S.-Japan trade
patterns. Students could be prompted to search through the tables for other examples of trade patterns that
have similar regularities to them. In urging students to look for and to attempt to explain these patterns,
one is laying a solid foundation for the theoretical work that will be developed in the chapters to come.

The data for Table 1.1 were taken from several tables found in the back of the World Development Report,
published for the World Bank by Oxford University Press. This volume contains many more tables of data
and is a useful source for many additional “box items” such as those that we have inserted throughout
the text. Note that we have included a column of data on PPP estimates of real GNP per capita. The
construction of these measures is aimed at providing better cross-country comparisons of standards of
living, and the differences between these levels and standard measures of GNP per capita are often quite
large. Another excellent source of data is the Handbook of International Trade and Development Statistics
published by the United Nations Conference on Trade and Development. This volume contains
information on the export and import structure of your country by main product categories and selected
commodity groups. This is an excellent way of teaching fundamental patterns of comparative advantage.
In some cases it also provides an opportunity to illustrate the phenomenon of intra-industry trade. This
concept is especially important if you intend to cover the material in the latter part of Chapter 5. Finally,
tables are presented that calculate the degree of commodity concentration and diversification of exports
by country over time. These numbers are useful when discussing how trade leads to specialization in the
production of a few items. The Direction of Trade Statistics Yearbook, published by the International
Monetary Fund, presents bilateral trade flows (exports and imports) for all the countries that belong to
the IMF. The material here can be used to reinforce the idea that distance plays a very important role in
determining trade patterns. These data can also be used to make the point that, even though we will later
assume balanced international trade, bilateral trade flows need not be balanced; trade deficits in one
direction are often countered by trade surpluses in another (e.g., compare Australia-Japan trade with
Japan-U.S. trade).
2 Husted/Melvin • International Economics, Ninth Edition

 Chapter Outline
Introduction
Characteristics of National Economies
Economic Growth
International Trade
The Direction of International Trade
What Goods Do Countries Trade?
Summary
Exercises

 Suggested Answers for the End-of-Chapter Exercises

1. Explain why neighboring countries tend to trade extensively with each other.
The most obvious answer is transportation costs, both in money and in time. A firm will buy
components from the closer supplier rather than one farther away (given the same quality of product)
because transportation will likely be faster and less expensive. For example, U.S. automobile
manufacturers buy more parts from Canada than from Germany. Also, individuals in countries that
share borders are probably more familiar with each other’s business practices and customs, resulting
in lower transactions costs.

2. Use the information in Tables 1.4 and 1.5 and your knowledge of the Brazilian economy to summarize and
explain the trade pattern of Brazil.

Brazil being a large developing country with an abundance of natural resources, it is not surprising that crude
material (SITC code 2), and food and live animals as well as meat (SITC codes 0 and 01), constitute 26.6% and
29.6% of total Brazilian exports respectively. If you look up SITC code 2, you will find that crude material is
defined as mostly livestock, forestry and agriculture by-products, metalliferous ores and metal scrap, and
certain varieties of crude fertilizers. Other major exports are mineral fuels (10.05 percent) and petroleum
products (9.8%). Basic manufactures, which are again manufactured products mostly based on agriculture and
livestock, as well as crude iron and steel, constitute 11.8% of Brazilian exports. On the other hand, Brazil has
almost no domestic capabilities in the production of certain kinds of high-technology capital goods, like
machinery and transport equipment, and 39.3% of its imports are in that sector. It is worth mentioning that she
does have some domestic capability in the manufacturing of certain kinds of machines and transport equipment,
since, if you look at Table 1.4, you will see that 16.7% of Brazilian exports are also in that category! Chemicals
and mineral fuels are the two next largest percentages of Brazilian imports, followed by petroleum products and
basic manufactures.

3. Find five interesting facts in Table 1.1.

Many answers are possible to this question. The following list represents an example of potential answers.
 Chapter 1 An Introduction to International Trade 3

a. From 1980 to 2009, the index of openness decreased on average for both low and middle income
countries, and slightly increased for high income countries. The latter group’s index remained the
highest.
b. Average annual growth rate was lowest for high income countries for the 2000-09 period, with
several countries having growth rates of less than 1% and one (Italy) experiencing negative
growth.
c. Low income countries from Africa such as Chad, Sierra Leone, Ethiopia, and Mozambique
experienced high growth rates ranging from 5.4 to 7.2% during the period. High income
countries from Eastern Europe such as the Slovak Republic and Poland, and Asian countries such
as Singapore and Hong Kong had respectable rates of 4-6%. The country with the fastest growth
was China, with an impressive 10% average growth rate. Finally, other middle income countries
with rapid growth were India, Russia, Romania, and Panama.
d. All country groupings had one country that experienced negative growth rate.

4. Find five interesting facts in Tables 1.4 and 1.5.

Many answers are possible to this question. The following list represents an example of potential
answers.
a. The number one category of exports of almost every country listed is machines and transport
equipment.
b. The number one category of imports of almost every country listed is also machines and
transport equipment.
c. With the exception of Singapore, each of the developed countries imports a higher percent of
clothing than they import while the opposite is true of developing countries.
d. With the exception of Canada, each of the high-income nations exports a higher percent of
chemicals than they import while the opposite tends to be true of the developing nations.
e. Motor vehicles form a higher percent of exports than in imports in not just Germany and Japan,
but also in Mexico.

5. Compare the export rankings of the top ten leading exports of 1999 to the rankings of the top ten
leading exports in 2010 (see Table 1.3). Discuss some of the reasons why these rankings have
changed so dramatically.
Crude petroleum was the fourth most important export in 1999 but has climbed back to the top #1
spot by 2010. This return of crude petroleum to the number one position was probably due to
the increase in prices experienced in the last few years. Some of the most important changes in this
ranking are related to this pattern, including petroleum products (from 14th to 2nd) and gas (from
26th to 12th).
Another important change happened in medicinal and pharmaceutical products, which went from
15th to 6th place. Iron and steel also moved up from 10th to 8th place in top exports.
The fall in ranking of office machines and motor cars from 1st and 2nd place in 1999 to 3rd and 4th
respectively shows a shift in strategic importance of mineral fuels. The decline of cereals from 20th
to 30th may partially reflect sharp improvements in agricultural productivity. Apart from these
categories, the composition of the top ten exports has remained fairly stable.
6. Use Table 1.1 to find the three most open economies in 2009, and the three most closed. How does
the growth performance of these countries compare with the growth of the average country in the
table?
4 Husted/Melvin • International Economics, Ninth Edition

As of 2009, the three most open economies were Singapore (index 148.1), Hong Kong (153.1) and
Malaysia (82.2), and the three most closed were Panama (3.6), Rwanda (4) and Burundi (4.9). For
this particular period, there did not seem to be a correlation between openness and growth. Most
commonly, however, economists find a tendency for economies that are open to international trade to
also grow rapidly, although the figures for Panama and Rwanda say otherwise (one reason could be
the extremely low base/level of GDP in these countries). It may be due to the fact that countries that
concentrate their resources in a few export industries may achieve better economies of scale and be
more successful at innovating.
7. Use table 1.1 to find three countries that have gone from being mostly closed to being open from
1980 to 2009. Also, find 3 countries where the reverse has happened. What has been the implication for
growth, if any?

Bangladesh, China and Argentina are three countries whose openness index has improved more than
threefold from 1980 to 2009. On the other hand, Panama, the Central African Republic, and Rwanda
are three countries where the exact opposite has happened. Although all the countries that have
opened up the most exhibited a high rate of annual growth from the period of 2000 till 2009, the
figures for the other group are ambiguous. Although the Central African Republic exhibited an
average annual growth rate of a GDP of -1, Panama and Rwanda both showed a growth rate
comparable to Bangladesh and Argentina.

8. According to Figure 1.2, intra-European Union trade accounts for a huge proportion of EU trade.
What factor or factors might account for this fact?
Several factors are clearly involved. First, because of the close proximity of these countries, transport
costs in moving goods are low. Second, by agreement, barriers to intra-EU trade are zero or at least
quite low. Finally, standards of living across the countries of the EU are quite similar. Hence, goods
produced in any one country should be in relatively high demand in any of the others.

9. According to Figure 1.2, the EU is a major customer of exports from Africa and the Middle East.
What types of products do you think these areas produce for export, and why do you think the EU is
their best customer?
Clearly, the leading export of the Middle East is petroleum. With the exception of the UK, all of
the countries of the EU are significant oil importers. Since the Middle East is relatively close
geographically to the EU it is not surprising that the EU is a major customer for Middle East exports.
African exports are highly concentrated in agricultural products (e.g., cocoa, coffee, banana, etc.),
petroleum (mostly from Nigeria), crude materials (including various minerals), and basic
manufactures. Since many of the African countries are former colonies of EU countries (e.g.,
Belgium, France, Germany, and the UK), there are long-standing trade relationships between these
countries and the EU.
10. Use Table 1.5 to compare and contrast the import patterns of China and the United States.

For most categories, the import patterns of these two countries are significantly similar. Some of the
differences include the following: China imports significantly more crude materials, but the United
States imports more mineral fuels. Also, the United States imports slightly more (as a percentage of
total imports) motor vehicles and petroleum products than China. Among the remaining categories,
the import patterns of China and the U.S. are very similar.