International Trade
Read this text, which compares the economies of the United States and Saudi Arabia to illustrate absolute and comparative advantage, mutually-beneficial trade, and opportunity costs.
Introduction to International Trade
![Figure 20.1 Apple or Samsung iPhone? While the iPhone is readily recognized as an Apple product, many versions (including re](https://learn.saylor.org/pluginfile.php/7082205/mod_book/chapter/79170/20.1.jpeg)
Figure
20.1
Apple or Samsung iPhone?
While the iPhone is readily recognized as an
Apple product, many versions (including recently released offerings)
have key components made by rival phone-maker Samsung. In international
trade, there are often "conflicts" like this, as each country or company
focuses on what it does best.
Bring It Home
Just Whose iPhone Is It?
The iPhone is a global product. Apple does not manufacture the iPhone components, nor does it assemble them. The assembly is done by Foxconn Corporation, a Taiwanese company, at its factories in China and India. But, Samsung, the electronics firm and competitor to Apple, actually supplies many of the parts that make up an iPhone.
In earlier models, Samsung parts made up as much as 26% of the total costs of production. And in more recent versions, Samsung manufactures the displays and cameras. In some ways, then, Samsung is both the biggest supplier and biggest competitor for Apple. Why do these two firms work together to produce the iPhone?
To understand the economic logic behind international trade, you have to accept, as these firms do, that trade is about mutually beneficial exchange. Samsung is one of the world's largest electronics parts suppliers. Apple lets Samsung focus on making the best parts, which allows Apple to concentrate on its strength – designing elegant products that are easy to use. If each company (and by extension each country) focuses on what it does best, there will be gains for all through trade.
We
live in a global marketplace. The food on your table might include
fresh fruit from Chile, cheese from France, and bottled water from
Scotland. Your wireless phone might have been made in Taiwan or Korea.
The clothes you wear might be designed in Italy and manufactured in
China. The toys you give to a child might have come from India. The car
you drive might come from Japan, Germany, or Korea. The gasoline in the
tank might be refined from crude oil from Saudi Arabia, Mexico, or
Nigeria. As a worker, if your job is involved with farming, machinery,
airplanes, cars, scientific instruments, or many other
technology-related industries, the odds are good that a hearty
proportion of the sales of your employer - and hence the money that pays
your salary - comes from export sales. We are all linked by international
trade, and the volume of that trade has grown dramatically in the last
few decades.
The first wave of globalization started in the 19th century and lasted up to the beginning of World War I. Over that time, global exports as a share of global GDP rose from less than 1% of GDP in 1820 to 9% of GDP in 1913. As the Nobel Prize-winning economist Paul Krugman of Princeton University wrote in 1995:
It is a late-20th-century conceit that we invented the global economy just yesterday. In fact, world markets achieved an impressive degree of integration during the second half of the 19th century. Indeed, if one wants a specific date for the beginning of a truly global economy, one might well choose 1869, the year in which both the Suez Canal and the Union Pacific railroad were completed. By the eve of the First World War, steamships and railroads had created markets for standardized commodities, like wheat and wool, that were fully global in their reach. Even the global flow of information was better than modern observers, focused on electronic technology, tend to realize: the first submarine telegraph cable was laid under the Atlantic in 1858, and by 1900, all of the world's major economic regions could effectively communicate instantaneously.
This first wave of globalization crashed to a halt early in the 20th century. World War I severed many economic connections. During the Great Depression of the 1930s, many nations misguidedly tried to fix their own economies by reducing foreign trade with others. World War II further hindered international trade. Global flows of goods and financial capital were rebuilt only slowly after World War II. It was not until the early 1980s that global economic forces again became as important, relative to the size of the world economy, as they were before World War I.
Source: Rice University, https://openstax.org/books/principles-macroeconomics-3e/pages/20-introduction-to-international-trade
This work is licensed under a Creative Commons Attribution 4.0 License.