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The Import Export Sector Deficit

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					CHAPTER 8
The Export-Import Sector


A. After studying this chapter the student should be able to:

   1. Describe how specialization is the basis for world trade.
   2. Trace the history of US trade.
   3. Identify the main US exports and imports, including the difference between
      trade in goods and services
   4. Place net exports in a C+I+G diagram
   5. Compare US exports, imports and trade deficit with other countries
   6. Identify the role of NAFTA, WTO, GATT and the EU.

B. Ideas for use in class

   Getting started

   1. Importance of world trade in students’ lives

       Ask students to work in pairs to find the country of origin listed on their shirt
       or t-shirt labels. List the countries of origin on the blackboard or transparency.
       Almost always the list is longer than anyone expected, including some
       obscure countries. It is evidence that world trade is important, often in ways
       we do not notice.

   2. How much do we trade?

       Ask students to make a list of five items they purchased in the last few days.
       Then ask them to identify items on the list as: imports; produced in the US; or
       a combination of the two. (Students may leave items blank if they are
       uncertain.) This activity will help students to identify the large number of
       imported goods they purchase, especially such items as electronics and
       clothing. But it is also an opportunity for the instructor to point out that
       imports are not a large percentage of most households total expenditures if all
       goods and services are counted. Ask students to estimate the import
       percentage of all goods and services (including education, housing and other
       items frequently overlooked.)

   3. What do students know about trade?

       Before the lecture, give students an ungraded ‘find-the-myth-quiz’ on
       international trade in order to show little-known, but important facts about
       trade: Which country is the world’s number one exporter? (Answer: US);
       With which country does the US do the most trade? (Answer: Canada); What


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   is the US trade balance in services? (Answer: surplus); Which highly
   developed country imports the least as a percentage of GDP? (Answer: US)
   After the lecture, students can re-take the quiz and compare the results.

Active learning strategies

[See introductory section for strategies for using small groups in class ]

1. Analyzing trade data (In small groups)

   Ask students to look at Figure 2 in chapter 8. Prepare a list of questions for
   each group including:

   What is the size of the overall deficit for every year since 1970? As a follow-
   up activity, students can graph these numbers.

   What is the trend in the deficit?

   Are changes in the trade deficit caused by changes in the goods sector or
   changes in the service sector?

   What caused the deficit to become smaller in 1991?

   What caused the deficit to become larger in 2000?

2. Analyzing current trade data; extension of active learning strategy number one
   (In small groups)

   Bring to class copies of a print or web site article on the most recent monthly
   US trade figures (one for each group). Available in The New York Times or
   www.bea.gov Ask student to use this data to update Figure 2 and then to
   answer the questions listed in number 1.

3. Debating world trade rules (in small groups)

   Choose the WTO, NAFTA, or EU (or allocate them to different groups). Tell
   students that during the course they will learn more about these organizations,
   including debates about their impact. At this early point in the course, it is
   sufficient to identify competing points of view on each.

   First, ask each group to construct a one sentence explanation of the
   organization they have been assigned.

   Then ask each group to list as many answers as they can to each side of the
   question assigned. Remind them that this is ‘brainstorming,’ so that they may
   not agree with each answer.



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      For the WTO, the questions are: Why is the WTO beneficial? Why is the
      WTO harmful?

      For NAFTA, the questions are: What are the benefits associated with
      NAFTA? What are the problems associated with NAFTA?

      For the EU, the questions are: What are benefits of the EU for the US? What
      are the problems caused by the EU for the US?

      After students have brainstormed their answers, ask each group to select the
      single most important argument on each side.

      Finally, ask groups to write a paragraph describing what data would be needed
      to assess which argument is strongest.

   4. Student practice with the C+I+G+Xn-M diagram (For visual and tactile
      learners)

      Students practice with the C+I+G+Xn-M in the following manner. Prepare
      strips of transparency, one for each student, cut into approximately ½ inch x 6
      inch segments. With a dark-colored marker, draw a line down the length in the
      middle of each strip. Photocopy, one for each student, a large-scale diagram
      showing the 45 degree line and an unmarked expenditure line (the expenditure
      line should be about 6 inches long to match the transparency). Students label
      the diagram, showing the expenditure line as C+I+G. Then by placing the
      transparency on top of the C+I+G line, students can show what happens when
      net exports are added (line moves up for a surplus; down for a deficit). Save
      the transparencies and diagrams to illustrate other concepts, including the
      multiplier, deflationary, and inflationary gaps.

C. Homework questions and projects

   1. Recent trade data (web activity) Ask students to go the US Department of
      Commerce web site at www.bea.gov/bea/di1.htm
      Ask them to find the following data for the most recent time period:
      a. Balance on goods
      b. Balance on services
      c. Overall deficit

      (Students might also find data for trade with individual countries and for
      trade in individual goods or services.)




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      2. The WTO (web activity)
         Ask students to go the WTO web site at www.wto.org
         Ask them to find information on recent WTO rulings.
         What was the issue under dispute?
         How did the WTO rule?

      3. Analyzing recent trade data (print media activity)
         Ask student to find an article from the previous month’s newspapers or
         periodicals that analyzes the most recent monthly change in the trade deficit or
         surplus. Students should submit as homework a photocopy of the article and
         answers to the following questions:

         What was the source and date of the article?

         What is the trend in the trade deficit/surplus identified in the article?

         Is the trend different for particular sectors or for particular countries?

         What are the reasons given for changes in the trade deficit/surplus?

         What is expected to occur as result of the trade deficit/surplus?

Answers to Multiple-Choice Questions

1.       c                                         15.     c
2.       c                                         16.     a
3.       b                                         17.     a
4.       d                                         18.     b
5.       c                                         19.     c
6.       d                                         20.     b
7.       a                                         21.     c
8.       b                                         22.     c
9.       a                                         23.     c
10.      b                                         24.     b
11.      b                                         25.     c
12.      b                                         26.     b
                                                   27.     a
13.      a                                         28.     c
14.      c                                         29.     b




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Answers to Fill-In Questions

1.       the United States
2.       export - imports
3.       the United States, Canada, Mexico
4.       370
5.       agricultural subsidies
6.       32 - 33
7.       China
8.       10 - 11
9.       Canada
10.      goods; services
11.      two
12.      Mercosur
13.      more competition from low-wage Third World workers
14.      1973 (early 1970s)



ANSWERS TO QUESTIONS FOR FURTHER THOUGHT AND DISCUSSION

1. Explain how and why trade barriers have come down in recent decades.

      The main reason why trade barriers have come down is the formation of GATT,
      and its successor, the WTO. These organizations, to which nearly all of the
      world’s nations have belonged, have progressively reduced tariffs and other trade
      barriers among its members. Regional trade organizations such at NAFTA,
      Mercosur, and the European Union have had even more success. All of this has
      been made possible by the widespread belief that trade and globalization are
      beneficial to every nation. However, that belief is hardly universal, as evidenced
      by the massive protests in Seattle, Prague, and other cities.

2. Do you think we should have joined NAFTA? Try to argue this question from both
   sides.

      Pro: Trade between nations always benefits both nations. The United States
      concentrates on producing the goods and services that it produces most efficiently
      and sells them to Mexico. And Mexico does the same with us. This pushes up the
      standard of living of both nations.




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   Con: American manufacturers have moved factories to Mexico costing American
   workers hundreds of thousands of jobs. The Mexican factories pay their workers
   only a dollar an hour and the factories do not uphold the higher environmental
   standards of those in the United States. Furthermore, by buying products from
   Mexico and other poorer nations, American consumers are encouraging the
   exploitation of low-paid workers, many of whom are children.

3. List the reasons why our trade deficit has grown so quickly since the mid-1990s.
   What can we do to help bring it down?

   (1) Our economy has grown more rapidly than those of our major trading
        partners, especially Canada and Western Europe.
   (2) Americans have been on a buying binge.
   (3) The dollar has risen relative to other currencies, making imports cheaper to
        American consumers and making our exports more expensive to foreign
        consumers.
   The federal government can make savings more attractive by making more
   savings tax-free, and state sales taxes and federal excise taxes can be raised.
   The Treasury can push the value of the dollar down by selling dollars in exchange
   for foreign currencies.


4. Identify the goods and services that you purchase that are imported. How would
   your lifestyle change if these imports were unavailable?

   Everyone’s answer will differ. I drive a Toyota Camry, own a Sony T.V. and
   VCR, and have a Nikon camera. Most of my clothing is imported, I often watch
   foreign movies, and I sometimes travel abroad. My lifestyle would suffer if I were
   to substitute American for foreign goods and services. Indeed, we’ve pretty much
   stopped making TVs, VCRs, and cameras in the United States, and the American
   goods and services that I would substitute would, at least in my mind, be inferior
   to those originating abroad.


5. How would your life change if the U.S. were no longer the world’s leading
   exporter?

   If you worked for a major exporter like Boeing or Chase Bank, you might be out
   of a job, or perhaps you would earn less money. Or, even if you didn’t, you might
   find that all those people who lost their jobs at Boeing, Chase, and other leading
   exporters might, in effect, bid salaries down, and you would end up making less
   money.




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6. Explain how international trade (exports and imports) affects a nation’s output,
   employment, and income.

   A nation will produce more because it will concentrate on providing those goods
   and services which it can produce most efficiently. Its employment may be
   higher, since workers in our major exporting firms will be more productive
   (although even without trade, these people would probably still be working at less
   well-paying jobs). Income would be higher since we would be producing more.
   This, in turn, would enable us to consume more.




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