Explain the Relation between Trade and World Output

World output or global output represents the sum of the entire amount of goods and services produced by all the countries of the world for a certain period of time. In simple terms, if each country produces a pair of shoes, a computer and a sack of coffee, multiply that by the total number of countries in the world to get global output.

On the other hand trade, or more correctly international trade, is the exchange of goods and services across international borders. Since it is impossible for all the countries to produce similar products, trade allows countries to focus on products that they have an advantage in producing over other countries. A classic example is crude oil. Not all countries have an abundant supply of oil – the reason why Middle East countries sell their excess oil to countries that need them.

Trade encourages effective and efficient use of a country’s resources. A country that is more proficient in growing coffee could forgo the manufacture of computers and shoes and increase their yield of coffee to ten sacks of coffee and trade some of these excess coffee to a country that has an advantage at making shoes and computers. Following the logic of this interaction, as a country becomes more efficient in producing goods and services its total output also increases. And, as all the other countries increase their total output, world output ultimately increases.

Describe the broad pattern of international trade

International trade has been evolving at a much faster pace after World War II. Much of the evolution of trade in present times is attributed to rapid advancements in technology. Production of goods is now done at a much faster and more efficient rate – lowering overall manufacturing cost and doubling-up output. At the same time, it is now faster to ship goods to any point in the globe and attendant support communication facilities have improved tremendously.

According to statistics from the World Trade Organization (the organization tasked to oversee international trade):

–  75 percent of the global exports come from developed countries, while only 25 percent are from developing ones.

– 83 percent of exports from developed countries are manufactured goods, accounting for 62 percent of total world exports.

– Manufactured goods from developing countries are growing – now registered at 56 percent of their total exports — and account 14 percent of the world total.

– Today, more primary products are being exported by developed countries than by developing countries: 14% of world exports, compared with 11% by developing countries.

If the nations of the world were to suddenly cut off all trade with one another, what products might you no longer be able to obtain in your country?

An obvious answer is oil since it is one of the top imports of the country. Still, other items would be woodcrafts and furniture and certain agricultural products like rubber and natural oils. If the other trading country is China, products that will no longer be available here are office equipment, shoes and other articles of apparel, telecom and sound equipment, and, professional and scientific equipment.

Choose one other country and identify the products it would need to do without

In the case of China, products that would no longer be available in that country are electrical and heavy machineries, mineral fuel, oil, seeds and fruits, organic chemicals, iron and steel, aircraft and spacecraft, and cotton, yarn and fabrics.

Discuss trade patterns

Trade patterns deal with what goods and services a country trades, with whom, and in what direction. Trade patterns are studied in two ways: through the pattern of movement in commodities like oil, capital and raw materials, and, through factor contents or the amounts of primary factors used in the production of goods.

Trade patterns reveal the current state of international trade, the direction it is heading and its effect on overall global output. Trade patterns also reveal emerging markets as well as markets that are on the decline.

Trade patterns also influenced by global events that do not deal directly with international trade. These events include the September 11 attacks, SARS and the war in the Middle East.

The current trade pattern reveals an interesting trend: prior to World War II, primary commodities came mostly from developing countries whereas manufactured products came mostly from developed countries. After the WW II, the trend has reversed and that reversal continues up to the present.

Explain the methods governments use to promote and restrict international trade

International trade is generally regulated and controlled via imposition of tariffs. Nations carry out such measures in three ways: on their own (unilateral); in agreement with another country (bilateral); or, in agreement with several other countries (multilateral).

Non-tariff measures include imposition of quotas and voluntary export restraints (VERs) – a restriction on a country’s imports that is achieved by negotiating with the foreign exporting country for it to restrict its exports.

To promote international trade, countries give concessions like preferential trading agreements (PTAs), custom unions and common markets. Custom unions are groups of countries that who adopt zero tariffs and no other restrictions on trade when trading among them. Common markets on the other hand, are groups of countries, who choose to eliminate all barriers to movement of both goods and factors among themselves.

References

World Trade Report: 2006 (2006). World Trade Organization. Retrieved October 30, 2007

from the World Wide Web:

http://www.wto.org/english/res_e/reser_e/world_trade_report_e.htm

Deardorff, A. (2001). Deardorff’s Glossary of International Economics. Retrieved October

30, 2007 from the World Wide Web:

http://www-personal.umich.edu/~alandear/glossary/

Morrison, W. (2007). China-US Trade Issues. Retrieved October 30, 2007 from the World

Wide Web: http://www.fas.org/sgp/crs/row/RL33536.pdf

Wild, J. Wild, K., & Han J. (2006). International Business. Prentice Hall