Specialization and Trade

Introduction

Every day, we encounter goods and services that are produced abroad, a consequence of specialization and trade.

To understand the potential advantages of specialization, take a look at the global process that went into manufacturing the iPhone 6S when it was released in September 2015. While millions of buyers went to their local Apple Store to buy a phone, they may not have realized that before the product was ready for consumer purchase, its loudspeaker was produced at Cirrus Logic in Austin, Texas; its camera was produced by Omnivision Place in Santa Clara, CA; and its home button was produced by Taiwan Semiconductor Manufacturing Company in HsinChu, Taiwan!

The importance of trade has been growing. Notice in the following graph how world trade has grown exponentially over the last two centuries. Trade is a crucial driver of modern economies and represents a significant share of GDP.

The scale of world trade can also be visualized following the movement of cargo ships. It is impressive to see how these routes span the entire globe:

Why does consuming these goods from abroad make you better off than consuming only goods produced within your country? Or producing them yourself? We will see in this module that two key concepts help us answer these questions: comparative advantage and exchange. We will approach these questions using a simple model of trade with two countries and two goods. Even in cases where there are large differences in productivity between the countries, they can still both benefit from trade.

As you can observe from these visualizations, trade is an important tool that can connect countries, drive innovation, and improve market efficiency worldwide. However, trade can also have detrimental effects on communities and the environment if not executed responsibly. International trade ties the health of a country’s economy to the economies of countries across the globe. For example, large-scale economic shocks have historically resulted in sharp increases in job loss. The impact of this is especially problematic in small towns that are dependent on one or two firms engaged in global trade. With less ability to adjust to shocks, these communities can suffer from higher rates of substance use, suicide, morbidity, and mortality. We briefly discuss some of these issues at the end of the unit.