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International Trade

International trade involves the exchange of goods and services across borders, linking developed and developing economies. Countries specialize based on absolute and comparative advantages, leading to gains for consumers, producers, and the global economy. Factors influencing trade include resource distribution, domestic income levels, exchange rates, and the quality of goods.

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19 views3 pages

International Trade

International trade involves the exchange of goods and services across borders, linking developed and developing economies. Countries specialize based on absolute and comparative advantages, leading to gains for consumers, producers, and the global economy. Factors influencing trade include resource distribution, domestic income levels, exchange rates, and the quality of goods.

Uploaded by

kharmony665
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© © All Rights Reserved
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International Trade

International trade is the exchange of goods and services across international boundaries. In open
economies we enjoy goods and services from all over the world. Trade provides an important link
between developed and developing economies. The developed counties e.g.)US, UK, Japan provide a
range of consumer goods, capital equipment and financial services in exchange for raw materials and
certain types of agricultural products. Also in international trade are the ever increasing global receipts
from international tourism. This is of importance domestically as it is a source of foreign exchange.

Resources are not distributed evenly throughout the world. Some countries have large amounts of land,
but little labour eg) Australia. Other countries have a shortage of land, but abundant labour eg)
Singapore. Countries with little land will demand agricultural products from countries with abundant
land. Countries with little labour resources will demand labour intensive goods such as manufactured
goods.

This can be classified into countries having an Absolute Advantage and/or Comparative Advantage in
producing certain goods/services:

1) Absolute Advantage
Ability of a country to produce a good/service at lower cost per unit than another country that
produces the same good or service. With absolute advantage, a country is able to produce a
greater quantity of goods using the same amount of resources as its competitors. Countries
with absolute advantage can produce goods/services using a smaller number of inputs or a
more efficient process than another country producing the same product or service. Eg. US and
China producing clothes. These country has more access to technology and benefit from
economies of scale. Therefore China has an absolute advantage in manufacturing because they
can take advantage of low labor costs.

2) Comparative Advantage
A country has a comparative advantage in the production of a good if the opportunity cost of
producing the good is lower than that of other countries/trade partners. A comparative
advantage gives a country the ability to sell goods at a lower price than its trade partners. The
theory of comparative states that if countries specialize in producing goods where they have a
lower opportunity cost, they will be able to sell goods and services at a lower price than its
competitors then there will be an increased in economic welfare and stronger sales margins.

Gains from Trade/ Advantages of trade

The gains from trade are the advantages that a country obtains as a result of trade. Trade brings a win
win situation. There are at least two countries involved in trade. Both win or gain.

1) Consumers gain from trade


Consumers are now able to consume goods that they would not have without trade. Jamaica
does not have oil. Jamaica imports oil that enables the consumption of transport, Northern
Europe has a cold climate, from tourism Nothern Europeans gain the advantage of the
Caribbean’s warm weather. Consumers therefore benefit from a greater variety of goods and
services that is available and standard of living is improved

2) Producers gain from trade

Producers gain markets for their goods and services through international trade. Free trade
opens up the world as a market for your product. Firms are able to produced more and benefit
from economies of scale and improve efficiency

3) The world gains from trade


The world gains from international trade. Each country is able to specialize in what it produces
best. World output increases and the surplus are traded to the advantage of everyone

4) Countries benefit through foreign exchange


An economy gains valuable foreign exchange from international trade. Foreign exchange
enables more trade with more and more trading partners to take place

Factors that influence International Trade

1) Demand and Supply of resources- Resources are not evenly distributed throughout the
world as countries differ in climate and factor endowment. Therefore, each country has
advantages in producing some goods but cannot produce other goods efficiently. Therefore
countries trade
2) Domestic Income Levels- Higher income levels allow for citizens to purchase more imports
and lower income levels allow for fewer imports.
3) The exchange rate- The exchange rate. The higher the value of country’s exchange rate, the
greater the imports as consumers spend and vice versa less. Also, the lower the value of a
country’s currency the greater the exports as the value of the country’s goods will be
cheaper on the market and vice versa
4) Quality of domestic goods and changing taste of consumers- If domestic goods are of a low
quality compared with imported goods. Consumers would substitute local goods with
imported goods and thus increase imports. Caribbean countries are also influenced through
media to import foreign goods

5) TERMS OF TRADE (THE RATIO BETWEEN IMPORT AND EXPORT PRICE INDICES)- The terms of
trade influence trade because they will determine the level of exports necessary to import a
certain quantity of goods demanded. Eg. How many bags of coffee does Jamaica have to
supply to buy a barrel of oil.

Terms of Trade Index index= Export price index X 100


Import price index
The terms of trade shows how many imports a given quantity of exports can buy. A rise in
the value of the terms of trade is favourable. A rise in exports increase the terms of trade,
while an increase in imports increase it. The terms of trade may be influenced by the
exchange rate because a rise in the value of a country’s currency lowers the domestic prices
of imports and vice versa

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