Problems of American Economic Growth

By Bruce R. Morris | Go to book overview
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CHAPTER NINE
RELATIONS WITH OTHER ECONOMIES

Foreign Trade

Foreign trade plays a part in aggregate demand by affording markets for some of our production and by absorbing part of our purchasing power and savings as we buy or invest abroad. If we sell more than we buy, this is an added demand for our goods, at least temporarily. If we buy more than we sell, some of our purchasing power is absorbed.

More important, international trade brings the benefits of increased specialization or division of labor. When a country can resort freely to international trade it can specialize in the production of those products in which it is relatively more efficient and import those in which it is relatively inefficient. The result is an increased production of goods and a rising standard of living throughout the world.1 Another benefit of foreign trade is that we can obtain goods that cannot be produced at home, such as scarce metals or bananas, for example. Thus, the ability to trade is beneficial to a nation. The ability to trade enables all countries to grow by helping one another. Our trade policy is important to us and to total world trade.

Although foreign trade is extremely important for others, it is a small matter for us on an aggregate basis as our foreign trade is small relative to the total output. At the best our foreign trade is less than 10 per cent of our gross national product. In recent years exports of goods and services have been approximately 5 per cent of total output with imports slightly less. Seldom has the net balance exceeded 1 per cent of the gross national product. However, the United States is the largest exporter and importer in the world, the largest supplier of capital, and the largest importer of raw materials. The importance of its trade to the rest of the world is obvious. Our trade does assume importance, in the case of some commodities, as a check on excessive prices of industries with administered prices, as an absorber of excess purchasing power and thus a partial check on price

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1
This gain comes through the operation of the law of comparative advantage, which is explained in any elementary text.

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