DeLong on Gains from International Trade
UC Berkeley economist Brad DeLong has written one of the best short pieces on the gains from international trade. His post is titled “Are There Benefits from Free Trade?: DeLong FAQ.”
Well, typically and roughly, the average import we buy from other countries we get for 30% off–we use foreign currency that costs us $1.40 to purchase goods and services made abroad that would cost us $2.00 worth of time, energy, resources and cash to make at home.
But there’s more.
Typically and roughly, we sell the typical export to foreigners for about 40% more than we would get if we had to find a market for it at home: it costs us $1.00 worth of time, energy, resources and cash to make stuff that we can sell to foreigners for $1.40 worth of foreign currency. Thus for the country as a whole our foreign trade sector–exports and imports–is a way to get $2.00 worth of value for $1.00 worth of work. That’s a very good deal. Our foreign trade sector takes advantage of this good deal on a mammoth scale: in the fourth quarter of 2016 we were trading goods and services at a rate of $2.8 trillion a year–17.5% of national income. That means that in a typical year we sell exports that we could get $2 trillion for if we had to sell them here at home and get imports that would cost us $4 trillion. That makes us $2 trillion per year–$25,000 per family each year–richer and more prosperous.
That is a big deal.
Indeed. I do wonder where he gets the 30% and 40% estimates. They strike me (I admit this is gut feel) as about double the right numbers. But even if the right numbers are half of his estimates, there are huge gains from trade.
The whole thing, which is not long, is worth reading.