International Trade

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Some of the efficiency is due to comparative advantage, as in the Ricardo and Heckscher-Ohlin theories. In addition, some efficiency comes from taking advantage of increasing returns. Trade based on comparative advantage should tend to benefit small countries more than large countries. That is because the benefits of comparative advantage are proportional to the difference between the relative prices in world markets and the relative prices that would prevail in home markets without trade.

If that difference is large, then a country earns a large advantage from trade.

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If that difference is small, then there is only a small advantage from trade. Small countries are more likely than large countries to find that relative prices in the world market differ significantly from what would prevail in their home markets. Another benefit from trade is that it promotes dynamism and innovation within an economy. Improvements in manufacturing quality and productivity in the United States in recent decades have been credited, in part, to the pressure of competition from Japan and elsewhere.

An economy that is closed to trade is one in which inefficient industries and laggard firms are well protected. In fact, studies suggest that barriers to trade are a major cause of extreme underdevelopment. The countries that are most closed to trade tend to be the poorest in the world. Countries that have reduced trade barriers and increased the share of imports and exports in their economies tend to be among the fastest-growing nations. According to a World Bank study, twenty-four developing countries that became more integrated into the world economy in the s and s had higher income growth, longer life expectancy, and better schooling.

China, India, Hungary, and Mexico are among the countries that adopted policies that allowed their people to take advantage of global markets. As a result, they sharply increased the amount of their GDP accounted for by trade. Real wages in these countries rose and the number of poor people fell.

The study also points out that two billion people—particularly in sub-Saharan Africa, the Middle East, and the former Soviet Union—are in countries being left behind. Their economies have generally contracted, poverty has increased, and education levels have risen less rapidly than in the more globalized countries. Another report notes that exports plus imports as a share of output among the richest countries rose from Moreover, among developing countries, that share rose from The success of India and China recently, and Japan, Taiwan, South Korea, and other countries in the s and s, is due in large part to trade.

If goods were perfectly tradable across borders, with no trade barriers or transactions costs, then there would be no reason for prices to differ. This gives rise to the idea of purchasing power parity, a theory of exchange-rate adjustment based on the law of one price. If the same good sells for one hundred dollars in the United States and one hundred euros in Europe, then according to the law of one price the exchange rate between dollars and euros ought to be one. The theory of purchasing power parity is that this relationship holds for an overall market basket of goods and services.

Empirical tests tend to show only a weak tendency for exchange rates to move in the direction of purchasing power parity. This means that cross-border trade is not nearly friction free. The failure of purchasing power parity to hold, except perhaps in the long run, indicates that transportation costs, language-translation costs, and other factors limit the integration of global markets.

In , U. The excess of imports over exports is called a current account deficit. What caused this deficit? Modern economists believe that the trade surplus and capital flows are mutually determined. Imagine that all international trade took place in the form of barter of goods and services. If you wanted to buy a Japanese car, you would have to offer something of equivalent value in return. In that case, trade in goods and services would have to balance, and there would be no trade deficits. To obtain a Japanese car without trading goods and services, the Japanese have to accept financial assets in exchange for cars.

These assets could be dollars, shares of U. A country that is accumulating foreign assets will necessarily run a trade surplus. A country that is selling assets to foreigners will necessarily run a trade deficit. A country will accumulate assets when its domestic saving is greater than its domestic uses of saving.

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A country will sell assets when its national saving is insufficient for its domestic uses of saving. Typically, one would expect wealthy countries to have excess saving and to invest in capital-poor countries. From this perspective, it is an anomaly that the United States is a capital importer and China is a capital exporter.

Trade in services, Annual, 2018

However, the United States is a relatively attractive country in which to invest, and American policies tend to encourage consumption rather than saving. Economic theory indicates that international trade raises the standard of living. A comparison between the performance of open and closed economies confirms that the benefits of trade in practice are significant.

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  5. Arnold Kling is the author of Learning Economics, a nonmathematical introduction to economics. Footnotes 1. Your product and services may have to compete in a crowded market in the U.

    Global Commodities - Trading Precious Metals, Coffee, Cotton - Documentary

    S, but you may find that you have less competition in other countries. Selling a product to an overseas market can extend the life of an existing product as emerging markets seek to buy American products. One of the significant advantages of international trade is market diversification. Becoming less dependent on a single market may help you mitigate potential risks in your core market. Those who add international trade to their portfolio may also benefit from currency fluctuations. For example, when the U.

    You can also benefit from currency conversion.

    international trade | Definition, History, Benefits, & Types |

    Your company's profits from Japan will be in yen. When you convert the payments in yen against a weak dollar, that means more dollars for your American head office—a welcome boost to your bottom line. This alone could be one of the most valuable advantages of international trade. Another one of the advantages of international trade is that you may be able to leverage export financing.

    One of the advantages of international trade is that you may have an outlet to dispose of surplus goods that you're unable to sell in your home market. Doing business in other countries can boost your company's reputation.

    Trade and Globalization

    Successes in one country can influence success in other adjacent countries, which can raise your company's profile in your market niche. It can also help increase your company's credibility, both abroad and at home. This is one of the advantages of international trade that may be difficult to quantify and, therefore, easy to ignore. International markets can open up avenues for a new line of service or products.

    It can also give you an opportunity to specialize in a different area to serve that market. Skip to content. Menu Menu. United States Change Country. Help Log In. Cash Back Rewards Home. Issuers and Acquirers Providers and Developers. Small to Mid-Sized Businesses. Most Popular Cards. Travel Rewards Cards. No Annual Fee Cards.

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