International Trade Basics

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Questions and Answers

What is a reason why countries import goods and services?

Because they want to reduce their employment rates

Because they want to reduce their trade balance

Because the imported goods are of better quality and design (correct)

Because they have the capability to produce them domestically

What is the Law of Comparative Advantage?

A concept that imports are always cheaper than domestic production

A policy that protects domestic industries against foreign competition

A principle that a nation benefits from specializing in producing goods with comparative advantage and exchanging them with other countries (correct)

A theory that a nation should specialize in producing goods with absolute advantage

What is an advantage of protectionism?

More growth opportunities for local industries (correct)

Lower employment rates

Decreased trade balance

Increased imports

What is a consequence of protectionism?

Stagnation in technological advancements Signup and view all the answers

What is an example of imports?

Foreign goods and services bought by citizens of another country Signup and view all the answers

What is a disadvantage of protectionism?

Limited choices for consumers Signup and view all the answers

What is an export?

A domestic good or service sold to citizens of another country Signup and view all the answers

Why do countries trade?

Because they cannot produce certain goods and services domestically Signup and view all the answers

What is a consequence of economic isolation?

Political and cultural isolation Signup and view all the answers

What is the purpose of tariffs?

To encourage domestic production Signup and view all the answers

What is the formula for calculating Gross Domestic Product (GDP)?

GDP = C + I + G + NX Signup and view all the answers

What is the difference between Gross Domestic Product (GDP) and Gross National Product (GNP)?

GDP considers location, while GNP considers nationality Signup and view all the answers

What is the purpose of a balance of payments?

To record all transactions between a country and the rest of the world Signup and view all the answers

What is a trading bloc?

A formal agreement between countries to reduce trade barriers Signup and view all the answers

What is the purpose of non-tariff barriers?

To reduce imports Signup and view all the answers

What is the difference between Gross National Product (GNP) and Gross National Income (GNI)?

GNI includes taxes, while GNP does not Signup and view all the answers

Study Notes

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)

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Description

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.