No Free Lunch: Economics for a Fallen World: Third Edition, Revised

Chapter Fifteen: Issues in International Economics 370 at the 1:1 ratio so their consumption possibilities are greater than their production possibilities. Just as with Taiwan, consumers in the U.S. can enjoy more food and iPads by specializing production according to our comparative advantage, and then engaging in mutually beneficial trade. Another benefit of allowing free trade between larger regions is that it allows for economies of scale in production that a home market never could. For example, Taiwan produces far more computer chips than it could ever use as a nation, and the size of the world market allows it to have very large and efficient factories. If trade was restricted to the home country only, not only would fewer units be produced due to not taking advantage of each nation’s comparative advantage, but also due to lost gains in efficiency with a larger market. BALANCE OF PAYMENTS The overwhelming benefits of mutual exchange have led to tremendous increases in global trade since WWII. While there are many critics of globalization and free trade, people are less hungry, live longer, and yes, they have the washing machine! The U.S. has tripled its trade, as seen in Figure 15.4 . One would not necessarily expect imports to exactly equal exports, and they almost never do. But this leads to great consternation of many who fear that trade deficits are bad and trade surpluses are good. In Figure 15.5 we can see that trade surpluses in the years following WWII (not shown) gave way to consistent deficits since the late 1970s. Shouldn’t we be concerned? I mean, even the Figure 15.4, United States Trade Growth since WWII. The U.S. imports and exports have greatly expanded since the conclusion of WWII. Indeed, global trade has expanded dramatically, leading to increased standards of living. Source: Bureau of Economic Analysis