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11/5/2017 What Is International Trade?

What Is International Trade?


By Reem Heakal | Updated December 16, 2015 3:36 PM EST

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If you walk into a supermarket and can buy South American bananas, Brazilian co ee and a bottle of
South African wine, you are experiencing the e ects of international trade.

International trade allows us to expand our markets for both goods and services that otherwise may
not have been available to us. It is the reason why you can pick between a Japanese, German or
American car. As a result of international trade, the market contains greater competition and
therefore more competitive prices, which brings a cheaper product home to the consumer.

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U.S. Foreign Trade by Country Hostile Takeover
Total goods traded with the United States in 2015 Halloween Strategy
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76.1k 61M 280M 1.35B 9.96B $598B

Total Trade

Source: U.S. Census. As of March 2016

What Is International Trade?


International trade is the exchange of goods and
services between countries. This type of trade gives
rise to a world economy, in which prices, or supply
Trading Center
and demand, a ect and are a ected by global events.
Political change in Asia, for example, could result in
an increase in the cost of labor, thereby increasing
the manufacturing costs for an American sneaker
company based in Malaysia, which would then result
in an increase in the price that you have to pay to buy
the tennis shoes at your local mall. A decrease in the
cost of labor, on the other hand, would result in you
having to pay less for your new shoes.
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Trading globally gives consumers and countries the opportunity to be exposed to goods and services dollars...
not available in their own countries. Almost every kind of product can be found on the international
market: food, clothes, spare parts, oil, jewelry, wine, stocks, currencies, and water. Services are also
traded: tourism, banking, consulting and transportation. A product that is sold to the global market
is an export, and a product that is bought from the global market is an import. Imports and exports
are accounted for in a country's current account in the balance of payments.

Increased E iciency of Trading Globally


Global trade allows wealthy countries to use their resourceswhether labor, technology or capital
more e iciently. Because countries are endowed with di erent assets and natural resources (land,
labor, capital and technology), some countries may produce the same good more e iciently and
therefore sell it more cheaply than other countries. If a country cannot e iciently produce an item, it
can obtain the item by trading with another country that can. This is known as specialization in
international trade.

Let's take a simple example. Country A and Country B both produce cotton sweaters and wine.
Country A produces ten sweaters and six bottles of wine a year while Country B produces six
sweaters and ten bottles of wine a year. Both can produce a total of 16 units. Country A, however,
takesLooking
threeforhours tobroker?
a quality produce the ten sweaters and two hours to produce the six bottles of wine (total
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of five hours). Country B, on the other hand, takes one hour to produce ten sweaters and three hours
to produce six bottles of wine (total of four hours).

But these two countries realize that they could produce more by focusing on those products with
which they have a comparative advantage. Country A then begins to produce only wine, and Country
B produces only cotton sweaters. Each country can now create a specialized output of 20 units per
year and trade equal proportions of both products. As such, each country now has access to 20 units
of both products.

We can see then that for both countries, the


opportunity cost of producing both products is
greater than the cost of specializing. More specifically,
for each country, the opportunity cost of producing
16 units of both sweaters and wine is 20 units of both
products (a er trading). Specialization reduces their
opportunity cost and therefore maximizes their
e iciency in acquiring the goods they need. With the
greater supply, the price of each product would
decrease, thus giving an advantage to the end
consumer as well.

Note that, in the example above, Country B could produce both wine and cotton more e iciently
than Country A (less time). This is called an absolute advantage, and Country B may have it because
of a higher level of technology. However, according to the international trade theory, even if a
country has an absolute advantage over another, it can still benefit from specialization.

Other Possible Benefits of Trading Globally


International trade not only results in increased e iciency but also allows countries to participate in
a global economy, encouraging the opportunity of foreign direct investment (FDI), which is the
amount of money that individuals invest into foreign companies and other assets. In theory,
economies can, therefore, grow more e iciently and can more easily become competitive economic
participants.

For the receiving government, FDI is a means by which foreign currency and expertise can enter the
country. These raise employment levels, and, theoretically, lead to a growth in the gross domestic
product. For the investor, FDI o ers company expansion and growth, which means higher revenues.

SEE: The Importance Of Inflation And GDP.

Free Trade Vs. Protectionism


As with other theories, there are opposing views.
International trade has two contrasting views
regarding the level of control placed on trade: free
trade and protectionism. Free trade is the simpler of
the two theories: a laissez-faire approach, with no
restrictions on trade. The main idea is that supply and
demand factors, operating on a global scale, will
ensure that production happens e iciently.
Therefore, nothing needs to be done to protect or
promote trade and growth, because market forces
will do so automatically.

In contrast, protectionism holds that regulation of international trade is important to ensure that
markets function properly. Advocates of this theory believe that market ine iciencies may hamper
the benefits of international trade and they aim to guide the market accordingly. Protectionism
exists in many di erent forms, but the most common are tari s, subsidies, and quotas. These NEW

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strategies attempt to correct any ine iciency in the international market.

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As it opens up the opportunity for specialization and therefore more e icient use of resources,
international
Looking for atrade has the
quality broker? potential
Read to maximize a country's capacity to produce and acquire goods.
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Opponents of global free trade have argued, however, that international trade still allows for
ine iciencies that leave developing nations compromised. What is certain is that the global economy
is in a state of continual change, and, as it develops, so too must all of its participants.

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