Saturday, December 18, 2010

Measuring Trade

This past week, there have been a number of posts and articles that address the continuing fascination with trade imbalances. But the three that follow are particularly helpful if you want your students to really understand the nature of trade.

First I present a pair of links that are related. The first is an article in The Wall Street Journal that connects the iPhone to the trade deficit. If you are a devotee of that particular piece of electronic hardware, examine it. You will notice it says "Assembled in China." What you may not realize is that is equivalent to "Made in China" for purposes of measuring trade. But the article explains that while, for statistical purposes, the last shipping point is what counts. The bulk of the cost of an iPhone is actually due to the U.S.

This is made even clearer if you look at this blog post on Carpe Diem. Mark Perry provides a clear explanation of how the Chinese actually are responsible for the smallest portion of the cost.

Don Boudreaux at Cafe Hayek provides another view of trade. Too often, our students think of trade as a tied to a single event or product. What they need is a clearer understanding of the concept of interdependence. They need to think beyond the initial exchange and examine what the consequences of that exchange. What other exchanges does it make possible?


Faizan. Q (fizzy) said...

Trade imbalance is both problematic and helpful. The benefits include the overall revenue from exporting more than importing which seems to be obvious. But when the countries such as the U.S import more (such as the deficit with China) then we’re able to enjoy the process of “comparative advantage”. The problems include how trade balance is measured globally. In the article, it was interesting to see how the Chinese are taking credit for 100% of the iPhone, when they only had a 5% influence over it. I think they should follow the way to measure any trade balance through measuring how much of a product was made at a certain location. If the location happens to be U.S which accounted for 95% of the materials for the product then it should have the “made in U.S” sign put on it.

Tim Schilling said...

You seem to misunderstand. It's not a matter of the Chinese taking credit; it's a matter of the U.S. assigning the credit.

The rules of this country are that the good is credited to the last country before entry. It's a matter of U.S. rules and policy, not Chinese.

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Megan Riba said...

We've been learning a lot about the different aspects of trade in Honors Econ. Balancing trade is something essential to any economy. In my opinion, country's should take advantage of comparative advantage not only to balance trade, but better their economy. As the pie chart in the article about the iPhone showed that it was put together by the labor of those in many different countries, which I think is beneficial; it's allowing the product to made cheaper but using the cheapest, most effective labor to construct a singe product. trade is a topic so complex that there isn't one answer on which to solve trade balance with. I think that a country needs to use all the tools they can to be more efficient and active in trade, not try to monopolize global trade.