Macroeconomics: International Trade
AAA
  1. Macroeconomics: Introduction and History
  2. Macroeconomics: Schools Of Thought
  3. Macroeconomics: Microeconomics Foundation
  4. Macroeconomics: Supply, Demand and Elasticity
  5. Macroeconomics: Money And Banking
  6. Macroeconomics: Economic Systems
  7. Macroeconomics: Inflation
  8. Macroeconomics: The Business Cycle
  9. Macroeconomics: Unemployment
  10. Macroeconomics: Economic Performance and Growth
  11. Macroeconomics: Government - Expenditures, Taxes and Debt
  12. Macroeconomics: International Trade
  13. Macroeconomics: Currency
  14. Macroeconomics: Conclusion
Macroeconomics: International Trade

Macroeconomics: International Trade

By Stephen Simpson

International trade is the exchange of goods, services and capital across national borders. It is a multi-trillion dollar activity, central to the GDP of many countries, and it is the only way for people in many countries to acquire resources they require. Absent trade, consumers and suppliers are forced to either develop substitute goods or devote a large percentage of their income to acquiring products where demand is inelastic and domestic supply is inadequate.

Two of the key concepts in the economics of international trade are specialization and comparative advantage.

It seems readily apparent that countries can benefit from trade if each country does something better than the other (i.e. can produce goods or services at a lower cost). What if one company is more efficient in every good? This situation is called absolute advantage.

Even in situations of absolute advantage, though, there can be benefits to trade. As long as a country is not equally superior in producing all goods, there will be different relative costs for producing various goods. This is where comparative advantage comes in; so long as the two countries have different relative efficiencies, the two countries can benefit from trade – the country with absolute advantage will still benefit by directing its resources to those goods where it is most productive and trading for the others.

Specialization refers to this process; countries (as well as individual businesses) can maximize their welfare by specializing in the production of those goods where they are most efficient and enjoy the largest advantages over rivals. (For more on advantages, check out Competitive Advantage Counts.)

A country's balance of payments basically tracks the financial flows between trading partners. The balance of payments includes the payments made for imports and exports, as well as financial transfers. Exports create a positive entry, while imports are a negative. That said, a balance of payments must always balance out at zero – a trade deficit (more imports than exports) must be balanced with foreign investments, declines in reserves, or increased debt; likewise, a trade surplus will be balanced out with financial outflows or increased reserves.

Within a nation's balance of payment is the current account. The current account is made up primary of a company's trade balance (exports minus imports), as well as net interest and dividends, and net transfer payments (like foreign aid). (To learn more on a nation's balance of power, check out What Is The Balance Of Payments?)

Impediments to Trade
While free trade is generally thought of as a positive, countries will periodically put up barriers to trade. Tariffs are taxes on imports that make imported goods more expensive and less competitive relative to domestically-produced goods. While national governments used to obtain a significant percentage of their receipts from tariffs (in the days before income taxes were common), tariffs today are more commonly used to protect domestic industries and/or to punish other countries for perceived wrongdoing (typically subsidizing local industries to the detriment of the importing country's industries).

Subsidies are transfer payments given by governments to domestic suppliers of goods or services. The motivation to provide subsidies is to increase production and/or lower prices for a country's consumers and/or to make domestically-produced goods more competitive with imports.

Quotas are limits on the amount of a good that can be imported in a given period. Quotas serve a similar purpose to tariffs in that the increase the price of imported goods, but quotas can be even more severe as no additional goods are available once the quota level is reached. (For more on international trade, see What Is International Trade?)

Macroeconomics: Currency

  1. Macroeconomics: Introduction and History
  2. Macroeconomics: Schools Of Thought
  3. Macroeconomics: Microeconomics Foundation
  4. Macroeconomics: Supply, Demand and Elasticity
  5. Macroeconomics: Money And Banking
  6. Macroeconomics: Economic Systems
  7. Macroeconomics: Inflation
  8. Macroeconomics: The Business Cycle
  9. Macroeconomics: Unemployment
  10. Macroeconomics: Economic Performance and Growth
  11. Macroeconomics: Government - Expenditures, Taxes and Debt
  12. Macroeconomics: International Trade
  13. Macroeconomics: Currency
  14. Macroeconomics: Conclusion
Macroeconomics: International Trade
RELATED TERMS
  1. LIBOR

    LIBOR or ICE LIBOR (previously BBA LIBOR) is a benchmark rate ...
  2. Global Recession

    An extended period of economic decline around the world. The ...
  3. Economic Exposure

    A type of foreign exchange exposure caused by the effect of unexpected ...
  4. Subprime Meltdown

    The sharp increase in high-risk mortgages that went into default ...
  5. Event Risk

    1. The risk due to unforeseen events partaken by or associated ...
  6. Heckscher-Ohlin Model

    An economic theory that states that countries export what they ...
  1. Are oil prices and interest rates correlated?

    Yes. No. Maybe. Definitely. There's no easy answer to this question. While many theories abound, the reality is that oil ...
  2. What is the difference between arbitrage and speculation?

    Arbitrage and speculation are very different strategies. Arbitrage involves the simultaneous buying and selling of an asset ...
  3. Who determines interest rates?

    In countries using a centralized banking model, interest rates are determined by the central bank. In the first step of interest ...
  4. What is the Mont Pelerin Society?

    The Mont Pelerin Society was formed in 1947 when economist Friedrich von Hayek invited 39 people to meet at Mont Pelerin ...
comments powered by Disqus
Related Tutorials
  1. Ethical Investing Tutorial
    Fundamental Analysis

    Ethical Investing Tutorial

  2. Economics Basics
    Economics

    Economics Basics

  3. Investing For Safety and Income Tutorial
    Bonds & Fixed Income

    Investing For Safety and Income Tutorial

  4. The Federal Reserve
    Economics

    The Federal Reserve

  5. Capital Budgeting
    Investing Basics

    Capital Budgeting

Trading Center