International Macroeconomics : International Trade

International trade of developing countries is the classic weak vs. strong dichotomy, and underdeveloped or developing countries cannot make it solely on their own efforts; the have nots need help from the haves. Developed nations trumpet the claim that the answer to developing nations’ international trade issues is untrammeled or open market activity as opposed to government intervention by developed nations’ governments. This begs the question as to what extent the governments of developed nations are or should be responsible for supporting developing countries’ growth in international trading markets. Often the protectionist actions of developed nations’ governments to enhance their own international trading activities are the very

Although multinational corporations and international trade institutions are the subject of criticism, not all observers share a negative perspective. Many commentaries are published which speak in favor of beneficial and positive accomplishments, especially in relation to the international institutions. For instance, free trade positively contributes to overall development of the world. Global free trade promotes global economic growth, it creates jobs, makes companies more competitive, and lowers

The exchange of goods and services among countries is known as international trade. It is the foundation of a global economy, where prices, supply and demand factors affect and are affected by events all around the world. Such trade provides an opportunity for countries to be exposed to products unavailable domestically and to provide their local products to foreign markets (Heakal, 2015). The following sections will discuss the benefits and drawbacks of international trade.

Although free trade has theoretically never been in full practice, it has become, by definition, to provide for unrestricted trade between countries with the presence of tariffs to solely bring about revenue to the government (Eaton 1913, 78). With the installment of free trade, a country is pushed to maximize production (Eaton 1913, 78). Its industries can center their resources and efforts on those products with the least expense, or opportunity cost, and resultantly sell or barter the goods to another country (Eaton 1913, 78)

For centuries economists have sustained free trade as the best free trade policy. Even so, after a more in depth analysis one can notice certain advantages and disadvantages of free trade. This report explains the concept of free trade, the implications of engaging in free trade and the pro and con opinions along with an explication of certain theories related to the concept.

Over many years there has been many conceptual theories devised to help explain the reasons why there is trade within the world accompanied by the possibilities that gains could or could not be made. This piece of work will examine four main theories put forward by Adam Smith (Absolute advantage, 1776) which was then expanded on by David Ricardo with his theory of the Ricardian Model (Comparative advantage, 1817). Also including the Heckscher-Ohlin model (relative factor abundance, 1919, 1933) and the ideas of New Trade Theory (Economies of Scale and Imperfect Competition). These ideas will be evaluated and synthesised to see if these explanations truly explain the reasons of trade theory.

It’s apparent by data presented by Rivera and Oliva (2004) and linked with data available in table 1 that since after the world war policies adopted to ensure unrestricted flow of products and services consequently lead to global competition and innovation which benefits all involved. Krugman (1986) further elaborates that with such trade liberalisation that there are a number of key benefits. Firstly, due to economies of scale enjoyed by nations, economies are able to gain from their comparative advantage. Secondly, there is a rise in intra-industry trade, increasing product differentiation enabling consumer satisfaction to be increased. Finally as Porter (1990) establishes, trade liberalisation ensures nations adopt sound economic policies to increase competitive advantage to ensure foreign investment occurs in their economy.

In theory, high tariffs and importation quotas are beneficial to domestic economies because they reduce the competition from foreign manufacturers for domestic industry. However, the effectiveness and advisability of tariffs and quotas is severely constrained by various factors that cannot be ignored. First, the relative weakness of the U.S. dollar makes it difficult for domestic manufacturers to compete internationally. Second, the fact that other nations (such as China, most notably) artificially manipulate the value of their currency to keep their domestic manufacturing costs low undermines the value of tariffs on their goods. Third, neither tariffs nor quotas is an effective mechanism when the goods at issue are no longer even produced domestically, as in the case of many of the cheaper consumer goods that the U.S. typically imports in high volumes from foreign manufacturers. Fourth, one consequence of controlling foreign competition through tariffs and quotas is that they are usually targeted to specific foreign nations, which can simply open the door to other foreign manufacturers from other nations to whatever extent those mechanisms are effective against specific nations targeted by them.

The International Trade Concepts simulation helps one to learn the advantages and limitations of international trade. One can also take what is learned from the simulation and relate it to the U.S. economy and the effects international trade has on it. Learning about how fiscal and monetary policies affect the exchange rate is important as well. Not only can one apply what was learned in the simulation to the U.S. economy but they can also apply it to their workplace. The Concept Summary of the simulation helps to make these applications.

International trade is the exchange of capital, goods, and services across international borders or territories. In most countries, such trade represents a significant share of gross domestic product (GDP). While international trade has been present throughout much of history, its economic, social, and political importance has been on the rise in recent centuries. Increasing international trade is crucial to the continuance of globalization. Without international trade, nations would be limited to the goods and services produced within their own borders.

International trade is important to the overall economic activity of nations, including the growth and domestics’ production. According to the United Nations Conference on Trade and Development (UNCTAD) and WTO, international trade has grown remarkably in recent decades as shown in figure 1 and 2.

Although the concept of free trade and globalisation may subtly imply a polarity between the developed and developing worlds, it can be argued that, in order to function successfully, the pressure to create a competitive and comparative advantage hold all nations on a level-playing field. Sinclair Davidson (2015) cited David Ricardo (1821) in his argument that foreign trade is, indeed, beneficial to a country, for a number of reasons. By reducing the cost of commodities and raising living standards through the creation of jobs, international trade allows developing countries to create a competitive advantage.

International trade implies the openness of the economy. It is the antithesis of self-sufficiency economy, where a country can own efforts to cover all the needs of its citizens. Currently, the development of an open economy can be seen in many countries. The advantages of this trend are simple: international trade in general defines the standards of the world market and couples with the reduction in the cost of goods. This happens due to the increased specialization in the distribution of production, which allows to allocate resources in the most rational way and encourages competition between domestic and foreign producers, which improves the quality of products. Open trade improves the investment climate and stimulates the inflow of

International trade is an old subject, but it continues to increase its relevance thanks to the intensification of links between countries. In fact, they are now more than ever interconnected through trade in goods and services, through cash flows and investments. These phenomena increase pervasively due to the growing trend toward globalization. Therefore, many theories, which highlight the gains from trade, were created and then developed and some of them are useful to explain the current international trade.

There are several theories about international trade. Through these theories, there seems to be closely linked and each one deriving from one another.