Question

Every year, the Gallup Poll asks a sample of people in the United States whether they believe foreign trade provides "an opportunity for economic growth through increased U.S. exports" or whether they believe foreign trade represents "a threat to the economy from foreign imports." The following table shows the responses for 2 years. a. Do you believe that foreign trade helps or hurts the economy? (Be sure to define what you mean by "helps" or "hurts.") b. Why might the general public's opinion of foreign trade be substantially different during an economic recession, when production and employment are falling, than during an economic expansion, when production and employment are increasing? c. Typically polls show that people in the United States under 30 years of age have a more favorable opinion of foreign trade than do people age 65 and over. Why might younger people have a more favorable view of foreign trade than older people?

Short answer

Foreign trade can be beneficial to an economy by opening markets for exports, leading to economic growth and job creation, but it may also be detrimental if it causes job loss or economic instability. Public opinion on foreign trade can vary greatly during different economic conditions, with more negative views during recessions due to job loss or competition. Younger individuals may view foreign trade more favorably due to being more involved in globally-connected industries or being more open to globalization.

Step-by-step solution

Define the Impact of Foreign Trade

Foreign trade helps the economy by increasing the market available for U.S. goods and services, potentially leading to economic growth and job creation. It can also hurt the economy if foreign imports surpass exports substantially, leading to trade deficits and potential losses in certain industries.

Understanding the Impact During Recessions and Expansions

During an economic recession, when domestic production and employment are falling, people might see foreign trade as a threat, particularly if they associate it with job loss or competition with cheaper imports. On the other hand, during an economic expansion, foreign trade might be viewed more favorably as it might support further growth and job creation.

Differences in Perception Based on Age

Younger people might have a more favorable view of foreign trade as they are more likely to be employed in industries that benefit from foreign trade, or they may be more open to globalization. Older people could have a less favorable view due to job loss or economic changes related to globalization that have negatively affected industries they've worked in.

Key concepts

Economic Growth Through Trade

The idea of harnessing economic growth through trade is deeply rooted in the principle that by removing barriers and expanding markets, countries can specialize in producing goods where they have a comparative advantage. This specialization boosts efficiency and productivity, leading to an overall increase in economic activity.

The concept of comparative advantage was introduced by economist David Ricardo, which suggests that even if one country is less efficient at producing all goods compared to another, it can still benefit from trade by concentrating on producing the goods where its comparative inefficiency is the least. This mechanism underpins much of international trade theory and has significant empirical support.

When a country opens its doors wider to foreign trade, it gains access to a larger variety of goods for consumers and businesses, which can stimulate competition and innovation. But it's not all about imports. Exports play a crucial role; they create demand for local products on an international scale, leading to job creation and investment in industries with export potential. Economic growth fostered by trade isn't just short-term; it often leads to long-term improvements by prompting structural changes in the economy, such as developing more skilled industries and enhancing technology transfer.

Of course, for this growth to be sustainable, there must be a balance between imports and exports. A country should strive to ensure that its export levels are sufficient to pay for its imports. If not, it could run into a trade deficit, which may have adverse effects on its economy if sustained over a long period.

Impact of Foreign Trade on Economy

The impact of foreign trade on an economy can be felt in various dimensions, ranging from the immediate short-term effects to the intricate long-term structural changes. In terms of immediate benefits, when a country exports goods and services, it experiences an inflow of foreign currency which strengthens its financial position and can be utilized for importing essential goods, technology, and capital goods necessary for future growth.

Sectoral Shifts and Job Creation

Trade leads to sectoral shifts in the economy; industries that are competitive in the global market tend to grow and absorb labour, while the less competitive ones might contract, leading to a reallocation of resources — both capital and labor. This reallocation can lead to both job creation in growing sectors and job losses in contracting ones. Policies and transitional support are therefore important to ensure that affected workers can transition to the new jobs created by trade.

Price Effects and Consumer Welfare

On the consumer side, foreign trade often lowers the prices and improves the quality of goods available, increasing consumer welfare. For countries importing resources scarce within their borders, foreign trade is critical and can reduce the cost of production for industries, strengthening economic competitiveness. However, it's imperative that while enjoying the benefits of trade, countries must guard against becoming overly reliant on foreign sources for essential goods, as this could leave them vulnerable to external shocks.

Foreign Trade and Economic Cycles

Foreign trade plays a significant role in influencing economic cycles, as it can either amplify or mitigate the ups and downs experienced by economies. During economic expansions, foreign trade can accelerate growth as rising demand leads to increased exports. Conversely, in times of economic downturns, the ability to export can sometimes provide a cushion if domestic demand weakens, although this isn't always the case.

Economies that are heavily reliant on trade may be more susceptible to external economic shocks. For instance, a recession in a major trading partner can have ripple effects, reducing the demand for exports, which in turn can slow down economic growth in the exporting country. On the other hand, during a global boom, countries with strong export sectors can see heightened growth as their goods and services find increased demand abroad.

It's important to note, as reflected in recent global events, that trade policies can also directly affect economic cycles. Protectionist measures, such as tariffs and trade barriers, can disrupt the free flow of goods and services, potentially leading to retaliatory actions, and may cause uncertainty that can dampen investment and consumption, thus influencing the economic cycle.

In managing the interplay between foreign trade and economic cycles, policymakers often find challenges in creating the optimal trade agreements and regulations that can foster stability and growth while navigating the inherent complexities of international economics.