THE VITAL ROLE OF INTERNATIONAL TRADE
International trade involves the purchase, sale or exchange of goods and
services across borders. More complex than domestic trade due to
national differences.
Benefits of Trade
Greater variety of goods and services not available domestically.
Enables countries to obtain what they lack.
Supports job creation, though uneven. In US, trade supports 1 in 5
jobs.
Raises living standards as countries can consume more by
producing where they have relative efficiency.
Trade Importance
Trade as share of GDP shows integration in global economy. Small
nations often most integrated.
Reasons for share: Small nations import more, large nations like US
have big domestic economies.
High income nations average 62% trade/GDP ratio versus 45-46% in
developing nations.
Top Trading Nations
China #1 in merchandise exports, US #1 in services. Most trade is
manufactured goods.
High income nations trade more with each other than with
developing nations.
Trade and Output
World exports exceeded output starting in 2008 until pandemic.
Rebounded after financial crisis.
Customs data captures trade flows but can be limited by unofficial
trade, incentives to distort data.
Shipping enables global trade but exploring more sustainable
technologies like wind power.
Asia's growth increases its role. Pacific century reflects shift in flows
from Atlantic to Pacific.
Trade Interdependence
Trade between pairs of nations can reflect importance of their
corporate ties.
Emerging markets often depend on advanced neighbors. Creates
opportunities but also vulnerability.
MERCANTILISM IN INTERNATIONAL TRADE
The Flawed Logic of Mercantilism
Mercantilism was the dominant trade theory from 1500s to 1700s in
European nations.
Main Principles
Trade surpluses: Maximize exports, minimize imports to accumulate
wealth, especially gold.
Government intervention: Imposed tariffs on imports, subsidized
home industries to boost exports.
Colonialism: Acquire colonies for cheap raw materials and as a
captive market for expensive finished goods.
Consequences
Expanded wealth and power of mercantilist nations with strong
militaries and navies.
Assumed world's wealth was fixed. Pursuing surpluses was a zero-
sum game.
Flaws
If all nations barricaded markets, international trade would halt.
Colonies couldn't develop properly by selling raw materials cheaply
and buying finished goods expensively.
Overall, mercantilism restricted trade and development. Later
theories recognized trade as positive-sum where all can benefit.
GAINING FROM TRADE - ADVANTAGE THEORIES
Absolute Advantage
Adam Smith's theory states nations should produce goods where
they have greatest efficiency over others.
Riceland produced rice better than Tealand; Tealand produced tea
better than Riceland. Each specialized and traded to boost output.
Concluded trade is positive-sum game, not zero-sum where one
wins at expense of others. Living standards raised by trade.
Comparative Advantage
David Ricardo's theory says nations benefit by specializing in good
produced relatively more efficiently.
Even if Riceland was best at both rice and tea, it still gained by
specializing in its best product (rice) and trading.
Tealand had comparative advantage in tea. Both could consume
more through specialization and exchange.
Assumptions and Limitations
Nations motivated only by maximizing production/consumption, just
two goods and countries.
No transportation costs, labor only input. Resources can't move
between countries.
Specialization does not improve efficiency over time.
Still supported empirically though new theories developed.
