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International Trade

By HWA | Publish On: August 29, 2012 | Posted In:

International Trade

International trade allows countries to exchange goods and services with the use of money as a medium of exchange. It should aim at a mutual gain for all participating countries. Each country can then focus on specializing in the products that they are best suited to manufacture or produce and import other goods from other trading partners who can supply them at a lower opportunity cost. A product that is sold to the global market is an export, and a product that is brought from the global market is an import. Imports and exports are accounted for in a country’s current account in the balance payments. Here are the few benefits of international trade that may include these allowing greater economies of scale as a result of work/product specialization, possible domestic benefits as consumers are allowed wider choices, promotion of competition leading to lower prices, better quality, and greater motivation to bring about technological breakthroughs and ability to access larger markets etc.

Absolute Advantage– It refers to a country’s ability to produce a certain good more efficiently than another country.

Comparative Advantage– It refers to a country’s ability to produce a particular good with a lower opportunity cost than another country.

Political Risk- Political risk refers to the possibility of a foreign government taking actions that would adversely affect a company’s investment base in that country. Examples include changes in tax laws, public policy, environmental regulations, and expropriation of assets. The outcome of a political risk could drag down investment returns or even go far as to remove the ability to withdraw capital from an investment.

Tariffs and Quotas work in International Trade

Tariffs aim at protecting domestic producers because they cause the import levels to decrease due to the associated tariff-caused cost increase. In other words, tariffs cause artificially inflated prices for some imports to provide a more level playing ground for domestic producers of the same good or product. Quotas, on the other hand, actually limit the amount of goods imported into a country, which ultimately means higher domestic prices. In this situation, a foreign importer of a good with a granted quota permit must sell that good at higher prices to make up for the controlled trade volume. This allows domestic producers of the same good to compete more effectively.

Few examples of Financial Markets in Nation:-

  • Primary markets are aimed at raising capital for initial issuance of securities.
  • Secondary markets are designed to provide a trading environment for existing securities.
  • Capital markets provide a trading mechanism for long-term debt and equity securities (e.g., stocks, mortgages, treasury bonds).
  • Money markets provide a vehicle for trading debt securities with maturities of less than one year, such as U.S. Treasury bills, bankers acceptances, commercial paper, Eurodollar time deposits, and money market mutual funds

Balance of Payments in Economics:-

In economics, the balance of payments account keeps track of all financial flows within a country during a given time period. There are two major categories of which to keep track:

Current accounts consist of

  • Exports/imports.
  • Services (e.g., transportation, communication, insurance, and finance).
  • Income, interest, dividends, and foreign-based investment income.
  • Current transfers that are not compensation based (e.g., gifts).

Financial accounts consist of

  • Investments made by residents living abroad.
  • Investments made by nonresidents made in the home country.
  • Direct investment made by firms.
  • Portfolio investments of various securities.

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