International Trade Basics

Why Countries Trade

• Countries trade because they cannot produce certain goods or services themselves, or they can produce them but choose to import them.
• Countries also import goods and services that are cheaper, offer greater variety, or have better quality, design, higher status, and technical features.

International Trade Terms

• Imports: Foreign goods and services bought by citizens of another country.
• Exports: Goods and services produced in one country and purchased by residents of another country.

Comparative Advantage

• Law of Comparative Advantage, first articulated by David Ricardo, states that a nation benefits from specializing in producing goods with an advantage and exchanging them for products of another country with an advantage in other kinds of products.

Protectionism

• Protectionism: A policy that protects domestic industries against foreign competition using tariffs, subsidies, and import quotas.
• Advantages of Protectionism:
  • More growth opportunities for local industries.
  • Lower imports and increased trade balance.
  • More jobs and higher employment rates.
• Disadvantages of Protectionism:
  • Stagnation of technological advancements.
  • Limited choices for consumers.
  • Increased prices due to lack of competition.
  • Economic isolation, leading to political and cultural isolation.

Methods of Protection

• Tariffs: Import duty levied on goods and services entering a country.
• Non-Tariff Barriers:
  • Quotas: Numerical limit on the value or volume of a product.
  • Voluntary Export Restraints: Exporter agrees not to export more than a specific amount of goods.
  • Domestic Subsidies: Financial aid or preferential tax given to domestic manufacturers.
  • Import Deposits: Requiring importers to make a deposit with the government for a fixed period.
  • Safety & Health Standards / Technical Specifications: Importers must meet standards or complete complicated formalities.

Gross Domestic Product (GDP)

• GDP: The total value of goods and services produced within a country in a specific period, regardless of nationality.
• GDP Formula: GDP = C + I + G + NX
  • C: Private consumption
  • I: Gross Investment
  • G: Government Spending
  • NX: Net Exports

Gross National Product (GNP)

• GNP: The total value of final products produced and owned by a country's residents, regardless of location.
• GNP Formula: GNP = C + I + G + NX + Z
  • C: Private consumption
  • I: Gross Investment
  • G: Government Spending
  • NX: Net Exports
  • Z: Net Income earned by domestic residents from overseas investments minus net income earned by foreign residents from domestic investments.

Gross National Income (GNI)

• GNI: Similar to GNP, including taxes.

Balance of Payments

• Balance of Payments: A statement of all transactions made between entities in one country and the rest of the world.
• Balance of Payments: Also known as the balance of international payments, a summary of all transactions of a country outside a country.

Trading Bloc

• Trading Bloc: A formal agreement between two or more regional countries that remove trading barriers between the countries in the agreement.
• Four Basic Models of Trading Blocs:
  • Free Trade Area: Members agree to reduce or abolish trade barriers (tariffs and quotas) between themselves.
  • (Other models not specified in the text)

Understanding the reasons behind international trade and key terms such as imports and exports. Learn why countries trade and the benefits of importing goods and services.