1. What are the prevailing patterns of trade between countries? What goods are traded?

The bulk of world trade occurs within industrialized countries; trade between industrialized countries and developing countries accounts for most of the rest. Canada is the largest buyer of U.S. exports, and Japan is the largest source of U.S. imports. Petroleum, motor vehicles, and petroleum products are the goods that have the largest trading volume, although world trade occurs across a great variety of products.

2. What determines the goods a nation will export?

A nation exports those goods for which it has a comparative advantage over other nations—that is, those goods for which its opportunity costs are lower than the opportunity costs of other nations. The terms of trade -- how much of an exported good must be given up to obtain one unit of an imported good—are limited by the domestic opportunity costs of the trading countries.

3. How are equilibrium price and quantity of goods traded determined?

As with most other markets, demand and supply determine the equilibrium price and quantity. For internationally traded goods, the export supply curve shows how much countries are willing to export at different world prices. The import demand curve shows how much countries are willing to import at different world prices. The international equilibrium price and quantity traded equal the point at which the export supply curve and the import demand curve intersect.

4. . What are the sources of comparative advantage?

There are two major sources of comparative advantage: productivity differences and factor abundance. Productivity differences come from differences in labor productivity and human capital, and from differences in technology. Factor abundance affects comparative advantage because countries have different resource endowments.

Other sources of comparative advantage are human skills differences, product life cycles, and consumer preferences.