<p> United States International Trade in Goods and Services A Case Study</p><p>Date of Announcement </p><p>October 18, 2002</p><p>Dates of Future Announcements</p><p>November 19, 2002</p><p>Announcement </p><p>The U.S. international trade deficit in goods and services increased by $3.4 billion to $38.5 billion in August from a revised $35.1 billion in July as exports decreased (-$1.0 billion) and imports increased (+$2.3 billion).</p><p>Notes to Teachers</p><p>Paragraphs that appear in italics are included only in the teacher’s version and are excluded from the student version. The discussions, student questions, and activities in the case studies early in the semester are at basic levels and will gradually increase in complexity later in the semester.</p><p>Goals of the International Trade Case Study</p><p>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.</p><p>Definition of Balance of Trade</p><p>A country’s balance of trade (or net exports) is the value of its exports minus its imports. If the result is positive, that is, exports are greater than imports, we describe it as a surplus in the balance of trade. A trade deficit occurs when imports are greater than exports. Net exports are equal to exports minus imports. Net exports are positive if exports exceed imports and are negative if imports exceed exports.</p><p>Data Trends</p><p>August exports were $81.9 billion and imports were $120.3 billion, leading to an overall trade deficit of $38.5 billion. Exports of goods decreased by $1.1 billion and exports of services increased by $.1 billion. Imports of goods increased by $2.2 and services by $.3 billion. </p><p>1 The trade deficit (exports minus imports) increased rapidly from March 1998 to September of 2000. From September 2000 to March 2001, the monthly trade deficit remained relatively stable around $33 billion. Between March and September, imports fell more rapidly than exports, causing the trade deficit to decrease from $33 billion to $28.4 billion. Following the events of September 11, both imports and exports of goods and services decreased dramatically. (For more information on the impact of September 11 tragedy on international trade, see the September and October, 2001, case studies.)</p><p>Figure 1 After September, the levels of exports and imports more closely approximated the previous levels and the trade deficit returned to the $28 billion to $31 billion range. Imports increased as the economy began to recover from the recession and as oil prices increased. Exports increased in tandem, but were not sufficient to offset the increase in imports. As oil prices continued to increase and the economy continued to recover, the trade deficit has moved higher, reflected in approximately $35 billion deficits of June, July, and August. Figure 2</p><p>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, were steady 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. Exports are currently 9.8 percent of GDP; imports are 13.9 percent; and the trade deficit is 4.1 percent of GDP.</p><p>Figure 3</p><p>Components of International Trade</p><p>The United States imports and exports both goods and services.</p><p>As shown in the graph to the left, currently goods Figure 4 account for 71 percent of our exports and 83 percent our imports.</p><p>Services account for 29 percent of our exports and 17 percent of our imports. (The spike in the graph in the percentage of imports that is made up of goods and the fall in the percentage that is services is due to the rather larger absolute decrease in imports of services during September.)</p><p>2 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.</p><p>The relative contributions of each to U.S. exports and imports for the year 2001 are illustrated in the two pie charts below.</p><p>Figures 5a and 5b</p><p>In 2001, the United States exported more capital goods (for example, semiconductors, computer accessories, and electrical equipment and machines) than we imported. Food, feed, and beverages exported and imported were approximately equal. But in automotive products, consumer goods, and industrial supplies (crude oil, chemicals, newsprint, plastics, and others), we imported significantly more than we exported. Automobiles (7%), semiconductors (5%), computers and accessories (5%), aircraft (5%) and telecommunications equipment (3%) are the largest components of U.S. exports. Among imports, automobiles (14%), crude oil (6%), computer accessories (6%), and apparel (4%) are the most significant goods categories.</p><p>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). (25% of exports, 29% 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). (6% of exports, 11% of imports)  Transportation: The transportation costs for goods moved by ocean, air, pipeline, and railway to and from the United States (5% of exports, 7% of imports)  Royalties and license fees: Fees for patents, copyrights, and trademarks. (14% of exports, 8% of imports)  Other: Government, defense and private services.</p><p>Changes in Imports and Exports of Goods and Services</p><p>Table 1</p><p>3 The decrease in exports in August was due to a decrease in goods exported with a slight increase in services exported. The U.S. exported more industrial supplies, but this was more than offset by fewer exports of food, feed, beverages, and capital goods,. The increase in services exported was due to increases in travel and passenger fares which are continuing to recover from their post-September 11 lows recorded in October, and imports of services increased primarily due direct military spending. The increase in imports during August was due to a relatively large increase in goods imported - primarily increased imports of consumer goods and industrial supplies. Service imports increased slightly.</p><p>International Trading Partners</p><p>Figure 6</p><p>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 with individual countries. As you can see in the graph, 25% of goods exported from the U.S. are sent to Canada, while 20% of all U.S. goods imported come from Canada. Since our exports to Canada exceed our imports, the U.S. has a trade surplus in goods with Canada. The U.S. also has a trade surplus in goods with Mexico, Britain, and the Netherlands. More frequently, the U.S. runs a trade deficit in goods - that is we are importing more goods from abroad than we are exporting. Trade with Japan accounts for 13% of U.S. imports and 9% of U.S. exports. We are also running a goods trade deficit with China, Western Europe, Canada, Mexico, and the OPEC countries. We are experiencing small goods surpluses with Australia, Hong Kong, and Singapore.</p><p>Interactive Questions for Students</p><p>1. What does it mean if a country has a balance of trade that is zero? 2. What does it mean if a country has a balance of trade that is in deficit? 3. If we are currently experiencing a trade deficit of $38 billion, what will happen to the trade deficit if exports increase by $1 billion and imports decrease by $2 billion? 4. 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? Explain why. 5. 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?</p><p>Sample Answers to Interactive Questions The answers should pop-up.</p><p>1. What does it mean if a country has a balance of trade that is zero?</p><p>4 It means that imports exactly equal exports. 2. What does it mean if a country has a balance of trade that is in deficit? It is importing more goods and services than it is exporting. It is described as a "deficit" because the U.S. is sending more dollars abroad than it is getting in return. 3. If we are currently experiencing a trade deficit of $38 billion, what will happen to the trade deficit if exports increase by $1 billion and imports decrease by $2 billion? $35 billion. Exports are added and imports subtracted to calculate the balance of trade. The $1 billion in exports reduce the deficit and the $2 billion decrease in imports reduce the deficit even further. 4. 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? Explain why. Spending on imports will grow and therefore net exports will fall. 5. If inflation is higher in the United States than in countries with which the United States trades, what will likely happen to U.S. exports? Why? Higher prices in the United States mean that people abroad will substitute other, now less expensive goods, for some U.S. goods. Thus, U.S. exports will decrease. </p><p>Key Concepts</p><p>Exports Imports Net exports Balance of trade Trade deficits and surpluses Exchange rates Tariffs and quotas</p><p>Relevant National Economic Standards</p><p>The relevant national economic standards are:</p><p>1. Productive resources are limited. Therefore, people can not have all the goods and services they want; as a result, they must choose some things and give up others. Students will be able to use this knowledge to identify what they gain and what they give up when they make choices. </p><p>5. Voluntary exchange occurs only when all participating parties expect to gain. This is true for trade among individuals or organizations within a nation, and usually among individuals or organizations in different nations. Students will be able to use this knowledge to negotiate exchanges and identify the gains to themselves and others. They will be able to compare the benefits and costs of policies that alter trade barriers between nations, such as tariffs and quotas.</p><p>5 6. When individuals, regions, and nations specialize in what they can produce at the lowest cost and then trade with others, both production and consumption increase. Students will be able to use this knowledge to explain how they can benefit themselves and others by developing special skills and strengths. </p><p>9. Competition among sellers lowers costs and prices and encourages producers to produce more of what consumers are willing and able to buy. Competition among buyers increases prices and allocates goods and services to those people who are willing and able to pay the most for them. Students will be able to use this knowledge to explain how changes in the level of competition in different markets can affect them. </p><p>18. A nation's overall levels of income, employment, and prices are determined by the interaction of spending and production decisions made by all households, firms, government agencies, and others in the economy. Students will be able to use this knowledge to interpret media reports about current economic conditions and explain how these conditions can influence decisions made by consumers, producers, and government policy makers. </p><p>19. Unemployment imposes costs on individuals and nations. Unexpected inflation imposes costs on many people and benefits some others because it arbitrarily redistributes purchasing power. Inflation can reduce the rate of growth of national living standards because individuals and organizations use resources to protect themselves against the uncertainty of future prices. Students will be able to use this knowledge to make informed decisions by anticipating the consequences of inflation and unemployment.</p><p>Sources of Additional Activities</p><p>Advanced Placement Economics: Macroeconomics. (National Council on Economic Education) UNIT SIX: The United States in a Global Economy</p><p>Economics USA: A Resource Guide for Teachers LESSON 14: International Trade: For Whose Benefit? LESSON 15: Exchange Rates: What in the World Is a Dollar Worth?</p><p>Handbook of Economic Lesson Plans for High School Teachers LESSON TWENTY-SEVEN: Money Makes the World Go Around--What Is It? LESSON TWENTY-EIGHT: Who Needs Money? Money and Exchange</p><p>Capstone: The Nation’s High School Economics Course UNIT FIVE: ONE. Money Isn’t Everything UNIT SIX: FIVE. Making a Macro Model: Imports and Exports</p><p>6 UNIT SEVEN: ONE. Solving World Trade Mysteries: The Final Chapter, The Future UNIT SEVEN: THREE. Why People Trade: Comparative Advantage UNIT SEVEN: EIGHT. Exchange Rates UNIT SEVEN: NINE. Disagreements Over World Trade</p><p>Handbook of Economic Lesson Plans for High School Teachers LESSON TWENTY-FIVE: The International Economy: Why Do Countries Trade?</p><p>International Trade, Teaching Strategies LESSON 1: To Choose or Not to Choose: That Is Not the Question LESSON 2: Why Do People Trade? LESSON 3: Why People and Nations Trade LESSON 4: Trade and Specialization LESSON 9: Trade Around the World LESSON 10: Trade Barriers LESSON 15: Global Production Systems</p><p>All are available in Virtual Economics, An Interactive Center for Economic Education (National Council on Economic Education) or directly through the National Council on Economic Education.</p><p>Authors: Stephen Buckles Erin Kiehna Bharath Subramanian Vanderbilt University</p><p>7</p>