Question

would you expect the United States to trade more with a) Mexico or Luxembourg, b) Japan or South Africa, c) China or Germany. Why? (Hint: Do not look up actual values here. Use a model we have studied). What if you found that based on the criteria you used, we trade with Ireland and Australia more than we expected. Why might that be?

Answer 1

Answer: International Trade is a very complex and dependent affair. The exchange of goods and services between two countries are dependent on various variables. At times, we see that best of the friendly nations are not actually trading good amount of goods and services, and sometimes we see that enemy nations trade the most.

                     Answer (a): United States will choose Mexico to trade more with, because, Mexican culture and market structure is very much similar to that of the United States, and thereby any type of trade with Mexico best suits both the importer and the exporter. Moreover, the demand patterns of the both the countries are very similar, leading to the quantities of trade being well established. Moreover, Mexico, though being currently not in good terms with US, still remains a very well traded country as the trade between the two countries have never been affected.

                   Answer (b): United States will choose Japan to trade more with, because, Japan has been the one of the best trading partners of US being technologically advanced and the demand from US for these goods and services being very high. Japan has been very cheap in producing most of the goods and services, which has created huge demand from the US market. Moreover, although the political relation with Japan has been bad, the trade relations has had to be good owing to the quality of products that Japan produces are considered as one of the top-quality products in the market. US has been one of the highest importers from Japan over many years now.

                  Answer (c): China has been one of most hostile nations from the US perspective. However, it has to be well accepted that US and China are the world’s most powerful nations. The goods and services produced in both these countries have been of varied nature and exogeneous in structure. US is famous for its quality of products and China is famous for its cheap products, which can be manufactured at a very low cost owing to the availability of raw materials and abundance of labor. Thereby, US and China become natural trade partners to satisfy each other’s market demands. Moreover, US also imports huge amount of raw materials from China owing to the cheap rates.