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The International Sector: An Introduction

24 April, 2015 - 11:52

Learning Objectives

  • Discuss the main arguments economists make in support of free trade.
  • Explain the determinants of net exports and tell how each affects aggregate demand.

How important is international trade?

Take a look at the labels on some of your clothing. You are likely to find that the clothes in your closet came from all over the globe. Look around any parking lot. You may find cars from Japan, Korea, Sweden, Britain, Germany, France, and Italy—and even the United States! Do you use a computer? Even if it is an American computer, its components are likely to have been assembled in Indonesia or in some other country. Visit the grocery store. Much of the produce may come from Latin America and Asia.

The international market is important not just in terms of the goods and services it provides to a country, but as a market for that country’s goods and services. Because foreign demand for U.S. exports is almost as large as investment and government purchases as a component of aggregate demand, it can be very important in terms of growth. The increase in exports from 2000 to 2007, for example, accounted for almost 20% of the gain in U.S. real GDP during that period. For the period 2004 to 2007, the increase in exports accounted for about 30% of the gain.