International Trade

International Trade

• International trade is important for countries to engage in with each other

Learning Objectives

• Explain the importance of international trade and why nations trade with each other.
• Explain why nations import certain goods, even though they can be made more cheaply at home.
• Explain how the gains from trade are divided between trading partners.
• Describe why some groups win and others lose as a result of freer trade.
• Identify various restrictions to, and some arguments against, free trade.

Trends in World Trade

• World Trade and GDP were tracked from 1971-2021
• International Trade by Major Areas was tracked from 2001–2021
• Merchandise Trade Between the Three Continents was measured in 2017
• The World's Leading Trading Nations was measured in 2021

Specialization and Trade

• Factor endowment is an advantage in production from better skills, equipment, or other resources.
• Differences in trade patterns can be the result of differences in climate, natural resources, human capital, and government policies.
• The theory of absolute advantage suggests that nations should specialize in producing goods and services for which they have an advantage and trade for goods and services for which they do not enjoy an advantage.
• Specialization and trade go hand in hand, leading to increased total production, but a country needs to trade to obtain products it is not producing.

Comparative Advantage

• The theory of comparative advantage is producing something at a lower opportunity cost than others are able to do.
• It can be better for both countries to specialize, with trade

Terms of Trade

• Terms of trade is the average price of a country's exports compared with the price of its imports
• Terms of trade = (Average price of exports / Average price of imports) x 100

Advantages of Free Trade

• Lower prices due to lower production costs
• Higher incomes
• A greater variety and quality of products
• Increased competition

The Effect of Free Trade

• In France and Germany, at a price of $6, supply and demand are equal
• France's Surplus in exports equals Germany's shortage in imports
• Domestic Consumers have more product choices and pay lower prices.
• Foreign Producers gain a bigger market and get higher prices.
• Foreign Consumers pay higher prices
• Domestic Producers get lower prices and experience more competition

Trade Restrictions and Protectionism

• Types of trade protection include import quotas, tariffs, currency-exchange controls, bureaucratic regulations and voluntary export restrictions
• A quota is a limit imposed on the production or sale of a product.
• Protectionism is the economic policy of protecting domestic producers by restricting the importation of foreign products.
• Import quotas raise the price, lower imports, and increase domestic production.
• A tariff is a tax or duty levied on imports
• Currency exchange controls are government restrictions limiting the amount of foreign currencies that can be obtained.
• Bureaucratic regulations are rules that make it hard for foreign products to enter the country or require them to be modified before entering.
• A voluntary export restriction (VER) is an agreement by an exporting country to restrict the amount of its exports to another country.

Arguments Against Free Trade

• Strategic industry argument: protection may be offered to a country's strategic industries so the country does not become dependent on foreign manufacturers.
• Infant industry argument: protection may be offered to certain “infant" industries until they are sufficiently mature to take on foreign competition.
• Cultural identity argument: free trade brings mass production and standardization, which may harm the importing country's sense of identity.
• Environmental and labor standards may be eroded to compete with countries whose standards are lower and have a cost advantage as a result.
• Some argue the multiplier effect should be considered, along with Uncontrolled movement of capital and labor.