Understanding International Trade

Comparative advantage refers to a country's ability to produce a good or service at a lower opportunity cost than its trading partners. It is significant in international trade as it encourages countries to specialize in the production of goods and services in which they have a comparative advantage, leading to increased efficiency and mutual benefit through trade.

The implementation of trade policies can be influenced by factors such as political power, policy change, domestic preferences, and collective action problems. These policies can impact stakeholders including domestic producers, consumers, foreign producers, and workers. The winners and losers of free trade can be affected by compensation measures and the influence of different sectors.

Protectionist policies can lead to negative effects on welfare, productivity, and international relations. Strategies to mitigate opposition to free trade include providing compensation for the losers, such as worker retraining programs and unemployment benefits, and promoting support for freer trade through addressing domestic preferences and political influence.

Comparative advantage in international trade refers to a country specializing in producing goods or services in which it has a lower opportunity cost compared to other countries. For example, if Country A can produce both wheat and cloth, but it can produce more cloth in the same amount of time than Country B, while Country B can produce more wheat in the same amount of time than Country A, then Country A has a comparative advantage in producing cloth, and Country B has a comparative advantage in producing wheat.

Trade specialization allows each country to focus on producing goods or services in which it has a comparative advantage, leading to increased efficiency and higher global output. This specialization leads to greater productivity, as countries can concentrate on what they do best, resulting in more efficient allocation of resources and higher overall economic welfare.

Absolute advantage refers to a country's ability to produce a good or service using fewer resources than another country, while comparative advantage refers to a country's ability to produce a good or service at a lower opportunity cost than another country. An example of absolute advantage is Country A being able to produce more cars than Country B using the same amount of resources. An example of comparative advantage is Country A focusing on producing computers because it has a lower opportunity cost in producing computers compared to Country B.

Political institutions can favor representation of narrow or broad interests, empower large groups, check the power of smaller ones, and promote liberalized trade. Democracies are less protectionist than dictatorships, and the push for desired trade policies has to be filtered through different political institutions.

International institutions facilitate cooperation and can promote cooperation. They also address issues of rule-making, monitoring, and enforcement, such as through the WTO's ability to enforce provisions and authorize sanctions for violators of rules.

Under WTO's rules, the national treatment principle states that foreign goods should be treated like domestically produced goods, and the most favored nation principle requires every trading partner to be treated like the favored trading partner without discrimination. An exception exists for regional trade agreements (bilateral trade agreements).

Trade liberalization is good for a nation's economy, creates winners and losers, involves strategic interaction, and international institutions can facilitate cooperation between domestic actors, which may lead to a prisoner's dilemma.

Portfolio investments and Foreign direct investment (FDI)

From 1974 to 1982

Pursuing industrialization

$140 trillion

The 2008 financial crisis

Debt crisis manager

No obligation to payback grant

There was a debt crisis

1997

It grew from $40 billion to $330 billion

Concessional loans have reduced interest rates, while non-concessional loans are granted at market interest rates

Bonds, loans, and stocks

Investors maintain control over the investment

Higher returns due to higher interest rates in developing countries, access to natural resources, and different business environments

90

Characterized by incomplete information

Default on the loan

Distribution of profits and control over resources

Differences in macroeconomic trends between countries

It can have negative effects on another country's economy

To oversee many aspects of international financial affairs

It is a tool of international financiers, doing little to assist poor nations in achieving economic growth

Funding infrastructure projects and augmenting private capital flow

Having a good credit rate which allows them to borrow money at a cheaper rate and lend it to developing countries with low interest rates

Investors have no role in management

Access to natural resources and different business environments

90% goes to wealthy countries due to lower risks

Cut off of future lending and seizure of assets

MNCs outsourcing jobs and seeking ethically relaxed governments

Concessional loans are offered at reduced interest rates, while non-concessional loans are granted at market interest rates.

Sovereign risk and restrictions on foreign ownership

They can potentially lead to negative effects on borrowing and lending countries

The benefits and costs of foreign investment do not equally affect every citizen

Incomplete information available for all transactions between debtors and creditors

To manage the international monetary and financial system

It provides limited impact in preventing financial crises

It is traditionally used only during crises to make economic adjustments

It has a very good credit rate which allows them to borrow money at a cheaper rate

To facilitate better cooperation between creditors and debtor countries

By setting financial standards and providing information, international finance facilitates relations between borrowers and lenders.

Latin America's total debt grew from $40 billion to $330 billion.

Debtor-creditor interactions may become a burden, impose constraints, and create conflicting interests.

High debt accumulation

It is provided as a grant with no obligation to payback

1974 to 1982

Tendency for debt accumulation

Severe economic downturn and currency devaluation

Pursuit of industrialization

Short-term trading of financial instruments such as stocks and bonds

Potential benefits for global efficiency and economic growth

Transfer of technology and managerial expertise

Non-compliance with loan repayment schedules and conditions