To cater for a globalized economy, thousands of companies around the world sign business deals every day, either as exporters or importers. Trade flows have evolved over time and are becoming increasingly intricate, with countless parts and components crossing multiple borders at different stages of production along global supply chains, before reaching the final consumer. But is this multifaceted reality fully accounted for in trade theories and well reflected in the statistical and analytical support available to trade policy makers?
The importance of international trade to economic prosperity is well documented and has been acknowledged for centuries. Countries open up to trade because it gives them the incentive to produce what they are relatively better at producing.
This in turn leads them to import goods and services that other countries are more efficient in producing. Trade also leads to downward pressure on consumer prices and greater product variety for importing companies and consumers.
Without trade, these countries would not benefit from the natural endowments of raw materials. A theoretical model for this was developed by Eli Heckscher and Bertil Ohlin. Known as the Heckscher—Ohlin model H—O model it states countries will specialise in producing and exports goods which use abundant local factor endowments.
Countries will import those goods, where resources are scarce. The theory of comparative advantage states that countries should specialise in those goods where they have a relatively lower opportunity cost.
India, with lower labour costs, may have a comparative advantage in labour-intensive production e. Therefore, it would be efficient for India to export these services and goods. While an economy like the UK may have a comparative advantage in education and video game production. Trade allows countries to specialise.
More details on how comparative advantage can increase economic welfare. The theory of comparative advantage has limitations, but it explains at least some aspects of international trade. New trade theory places less emphasis on comparative advantage and relative input costs. New trade theory states that in the real world, a driving factor behind the trade is giving consumers greater choice of differentiated products. We import BMW cars from Germany, not because they are the cheapest but because of the quality and brand image.
Regarding music and film, trade enables the widest choice of music and film to appeal to different tastes. When the Beatles went on tour to the US in the s, it was exporting British music — relative labour costs were unimportant. Perhaps the best example is with goods like clothing. Some clothing e. However, we also import fashion labels Gucci Italy Chanel France. Here consumers are benefitting from choice, rather than the lowest price. Economists argue that international trade often fits the model of monopolistic competition.
In this model, the important aspect is brand differentiation. For many goods, we want to buy goods with strong brands and reputations. Sometimes, countries may specialise in particular industries for no over-riding reason — it may just be a historical accident.
But, that specialisation enables improved efficiency. For high value-added products, multinationals often split the production process into a global production system. For example, Apple designs their computers in the US but contract the production to Asian factories. Trade enables a product to have multiple country sources. With car production, the productive process is often even more global with engines, tyres, design and marketing all potentially coming from different countries.
Trade tends to conjure images of physical goods import bananas, export cars. But, increasingly the service sector economy means more trade is of invisibles — services, such as insurance, IT services and banking.
Even in making this website, I sometimes outsource IT services to developers in other countries. International trade has been an important factor in promopting economic growth. This growth has led to a reduction in absolute poverty levels — especially in south east Asia which has seen high rates of growth since the s. Given the importance of free trade to an economy, it is unsurprising that people are concerned about the potential negative impacts.
I am just trying to better understand the trade wars, the trade rules, the stock market, and the economic factors that impact me as an American. According to my knowledge, international trading helps our economy as much as it helps others.
Thank you for the information about how international trade gives people the choices of differentiated products like cars, music, and films. Indeed international trade has helped create various bridges between producers and consumers across the globe. As a matter of fact, middlemen have made it easy for local producers to easily dispose off their produce. Besides that, globalization of trade has also made it easy for people to get first hand information about the state of the international markets, the world prices and so no.
The policy makers should emphasize on policies promoting exports, maintaining low and stable inflation rates and encourage government expenditure on development projects so as to encourage economic growth in Kenya. Am grateful about this words you explain about international trade it has given me a good idea in my economic development class. Am student of accounting but manor in economics this topic is very good for our policy Maker to understand for good policies making for us in Liberia.
Okoli Vincent International trade had been of great advantage to many nations enable them to use what they have to get what they want in order to achieve meaningful a development. We are going to make it properly.
International trade,is very important and they also likely to be imported from low labour cost countries. Pros and cons of international trade International trade plays an important role in improving living standards and reducing poverty levels. Importance of trade 1. Make use of abundant raw materials Some countries are naturally abundant in raw materials — oil Qatar , metals, fish Iceland , Congo diamonds Butter New Zealand.
Comparative advantage The theory of comparative advantage states that countries should specialise in those goods where they have a relatively lower opportunity cost. Greater choice for consumers New trade theory places less emphasis on comparative advantage and relative input costs. Service sector trade Trade tends to conjure images of physical goods import bananas, export cars. Global growth and economic development International trade has been an important factor in promopting economic growth.
Global GDP to Source World Bank Problems arising from free trade Given the importance of free trade to an economy, it is unsurprising that people are concerned about the potential negative impacts.
Infant industry argument. To develop, economies may need to restrict imports and diversify the economy. See more at Infant Industry Argument. Trade can lead to cultural homogenisation. Some fear trade gives an advantage to multinational brands and this can negatively impact local produce and traditions. Supporters argue that if local products are good, they should be able to create a niche than global brands cannot.
Displacement effects. Free trade can cause uncompetitive domestic industries to close down, leading to structural unemployment. The problem with free trade is that there are many winners, but the losers do not gain any compensation. On the upside, if the uncompetitive firms close down, ultimately new jobs will be created in different industries.
Environmental costs. The transportation of goods and services imposes environmental costs of pollution and carbon emissions, contributing to global warming Related Arguments for free trade Arguments against free trade. Great work. Okoli Vincent International trade had been of great advantage to many nations enable them to use what they have to get what they want in order to achieve meaningful a development Reply. International trade is the most powerful thing that exists and all of us get benefits from it.
International trade,is very important and they also likely to be imported from low labour cost countries Reply. We use cookies on our website to collect relevant data to enhance your visit. Our partners, such as Google use cookies for ad personalization and measurement.
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Today, international trade is at the heart of the global economy and is responsible for much of the development and prosperity of the modern industrialised world.
Goods and services are likely to be imported from abroad for several reasons. Imports may be cheaper, or of better quality. They may also be more easily available or simply more appealing than locally produced goods. In many instances, no local alternatives exist, and importing is essential. The production of goods and services in countries that need to trade is based on two fundamental principles, first analysed by Adam Smith in the late 18 th Century in The Wealth of Nations, , these being the division of labour and specialisation.
In its strictest sense, a division of labour means breaking down production into small, interconnected tasks, and then allocating these tasks to different workers based on their suitability to undertake the task efficiently.
When applied internationally, a division of labour means that countries produce just a small range of goods or services, and may contribute only a small part to finished products sold in global markets. For example, a bar of chocolate is likely to contain many ingredients from numerous countries, with each country contributing, perhaps, just one ingredient to the final product.
Specialisation is the second fundamental principle associated with trade, and results from the division of labour. Given that each worker, or each producer, is given a specialist role, they are likely to become efficient contributors to the overall process of production, and to the finished product. Hence, specialisation can generate further benefits in terms of efficiency and productivity.
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