International Trade Trade Most economists believe in free trade – the movement of goods between countries in the absence of harsh restrictions placed upon this exchange. The comparative cost principle is that countries should produce whatever they can make the most cheaply. Countries will raise their living standards and income if they specialize in the production of the goods and services in which they have the highest relative productivity: the amount of output produced per unit of an input (e.
g. raw material, labor).
Specialization is a situation that occurs when individuals or businesses produce a narrow range of products. Countries can have an absolute advantage – so that they are the cheapest in the world, or a comparative advantage – so that they are only more efficient than some other countries in producing certain goods or services. This can be because they have raw materials, a particular climate, qualified labor (skilled workers), and economies of scale – reduced production costs because of large-scale production.
Balance of payments Imports are goods or services bought from a foreign country. Exports are goods or services sold to a foreign country. A country that exports more goods than it imports has a positive balance of trade or a trade surplus. The opposite is a negative balance of trade or a trade deficit. Trade in goods is sometimes called visible trade (AmE: merchandise trade). Services such as banking, insurance and tourism are sometimes called invisible imports and exports.
Adding invisibles to the balance of trade gives a country’s balance of payments. Protectionism Government, unlike most economists, often wants to protect various areas of the economy. These include agriculture – so that the country is certain to have food – and other strategic industries that would be necessary if there was a war and international trade became impossible. Governments also want to protect other industries that provide a lot of jobs. Many governments impose tariffs or import taxes on goods from abroad, to make them more xpensive and to encourage people to buy local products instead. However, there are an increasing number of free trade areas, without any import tariffs, in Europe, Asia, Africa and the Americas and blocs such as: •The EEA: European Economic Area containing the European Union plus some other countries. •NAFTA: North America Free Trade Area: Canada, US and Mexico. The World Trade Organization (WTO) tries to encourage free trade and reduce protectionism: restricting imports in order to help local products.
According to the WTO agreement, countries have to offer the same conditions to all trading partners. The only way a country is allowed to try to restrict imports is by imposing tariffs. Countries should not use import quotas – limits to the number of products which can be imported – or other restrictive measures. Various international agreement also forbid dumping – selling goods abroad at below cost price in order to destroy or weaken competitors or to earn foreign currency to pay for necessary imports. Globalizing trends
The supporters of globalization, the way that the world’s economy increasingly functions as one unit, say that it will continue to cause growth and prosperity to spread thanks to: •Free movement of capital: money for investment can be easily moved around the world •Trade liberalization: obstacles to international trade are gradually being removed. •Shipping costs that are ever-declining thanks to the efficiency of containerization. •Telecommunications and computing costs that have fallen dramatically. Fair trade
The Fairtrade Foundation makes sure that producers and growers are paid a fair price, not just the market price, which can be catastrophically low. For example, prices can fall dramatically when there is overproduction around the world causing a glut in a particular commodity. Economic Crisis Economic crisis is marked by overpowering alarm, in financial or commercial circles, leading to a sudden and drastic restriction of credit and great shrinkage in commodity and property prices. A financial panic usually precipitates a wave of business failures and followed by a period of depression.