Chapter 21 - International Trade

• International trade is defined as the exchange of commodities and services among several nations.

• When countries become more ==prosperous==, they all tend to create more jobs.

• The reduction in ==international trade== was a result of rising ==tariff barriers== in countries around the world, as nations attempted to save jobs in their own ==domestic economies==, during a period of widespread ==unemployment==, by keeping out international trade.

• The last thing needed when real ==national income== is going down is a policy that makes it go down faster, by denying consumers the benefits of being able to buy what they want at the lowest price available.

• Absolute Advantage: The ability for one country to produce goods and services cheaper or better than its ==trading== partners. Sometimes an absolute advantage consists simply of being located in the right place or speaking the right language.

Comparative Advantage

• The ability for one country to produce specific goods or services at lower ==opportunity costs== than its trading partners.
• When there are ==scarce resources== which have alternative uses, producing more of one product means producing less of some other product.
• The benefits of comparative advantage are particularly important to ==poorer countries==.
• Comparative advantage is the idea that various nations have various resources, strengths, and capacities that enable them to manufacture particular things more effectively and efficiently than other nations.
• It enables each nation to focus on doing what it does best and gain from dealing with others for the goods and services it needs, this idea is a driving force behind international trade.

Economics of Scale

• Sometimes a particular product requires such huge ==investment== in machinery, in the engineering required to create the machinery and the product, as well as in developing a ==specialized labor force==, that the resulting output can be sold at a low enough price to be competitive only when some enormous amount of output is produced, because of economies of scale.
• The enormous levels of production that enable nations to sell at prices that can compete with the prices of similar products in the ==world market.==
• International trade creates greater ==efficiency== by allowing more economies of scale around the world, even in countries whose domestic markets are not large enough to absorb all the output of mass production industries, as well as by taking advantage of each country’s absolute or comparative advantages.

International Trade Restrictions

• When workers in a ==prosperous== country receive wages twice as high as workers in a poorer country and produce three times the output per hour, then it is the high-wage country which has the lower labor costs per unit of output.
• A prosperous country usually has a ==greater abundance== of ==capital== and, because of ==supply and demand==, capital tends to be cheaper there than in poorer countries where capital is more scarce and earns a correspondingly higher rate of return.
• At any given time, it is undoubtedly true that some industries will be adversely affected by competing ==imported products==, just as they are adversely affected by every other source of cheaper or better products, whether domestic or foreign.
• Trade Theory: Trade theory refers to the economic models and theories that explain why countries trade with each other. One such theory is the Ricardian model which says that comparative advantage leads to specialization and trade.
• ==Benefits== of International Trade: International trade has a number of benefits for countries, including access to a greater variety of goods and services, increased competition, lower prices for consumers, and the potential for greater economic growth and development.
• ==International Trade Agreements==: International trade agreements are formal agreements between countries that establish rules and regulations governing trade. These agreements facilitate trade by reducing barriers, such as tariffs and quotas, and creating a more predictable and stable trading environment.

Saving Jobs

• During periods of high ==unemployment==, politicians are especially likely to be under great pressure to come to the rescue of particular industries that are losing money and jobs, by ==restricting imports== that compete with them.
• Most arguments for protections are ==fallacies==, including that these restrictions maintain high ==wages==, save jobs, protect infant ==industries==, promote the ==national defense==, and prevent the dumping of inferior products:
• Tariffs – the taxes on imports of goods that raise the price of imports
• Import Quotas – the limits placed on quantities of specific imported goods
• Infant Industries: One of the arguments for international trade restrictions that economists have long recognized as valid, in theory at least, is that of protecting “infant industries” temporarily until they can develop the skills and experience necessary to compete with long-established foreign competitors.
• Dumping: A common argument for government protection against a competitor in other countries is that the latter is not competing “fairly” but is instead “dumping” its products on the market at prices below their costs of production.
• Foreign exchange, or the converting of one currency into another, is a component of global trade.
• Supply and demand in the foreign exchange market affect the exchange rate, or the cost of one currency in relation to another.
• Balance of Trade: The difference between a country's exports and imports is referred to as the balance of trade. A country is operating a trade surplus when exports exceed imports, and a trade deficit when imports surpass exports.
• Government initiatives aimed at limiting or restricting international trade are referred to as ==protectionism==.
• These regulations are frequently implemented to shield home industries from foreign competition and might take the shape of tariffs, quotas, embargoes, or subsidies.
• Yet, protectionism can also have unfavourable outcomes, such as higher consumer prices and a decline in the productivity and creativity of domestic businesses.

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