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International Trade

International Trade

The world we live in is a globalized world today. You can recognize this by just looking around and finding many examples of international trade in daily life. The smartphone you are glued to is probably an import from another country; the TV in your house is most likely an import; the coffee you drink every morning and more…

Of course, the U.S. doesn't only import products from other countries, it also exports products. For instance, Boeing makes airplanes in the U.S. and sells its airplanes to airlines around the world. Interested to learn more about international trade? Keep reading!

International Trade Definition

Consumers and countries trade because they believe that they would benefit from the trade. They believe the products they purchase are more valuable than the price they pay or the products they give up. Furthermore, the availability of different products is also increased thanks to international trade.

The exchange of goods and services among countries is called international trade.

In a global world, trading between countries or consumers provides access to a wider spectrum of products and services.

International Trade Coffee and most smartphones are imports StudySmarterCoffee and most smartphones are imports, WikipediaCommons

International Trade Economics

In an international and global world, international trade allows countries to specialize in some products and services and trade them for other products and services that are not possible or more costly to produce.

Thus, specialization is the main reason for international trade. When countries specialize, they produce the products and services they are good at producing. This can be in several ways: the country may have higher amounts of the required resources, has developed technology in the production of that product, or might have lower wages which decrease the production costs for these products.

If we want to understand what a country specializes in, we should look at the exports of the country.

The products and services that a country produces and sells to other countries are called exports.

Similarly, if we want to understand what the country buys from other countries, we should look at the imports.

The products and services that a country buys from other countries are called imports.

International trade has significant importance in all economies. Even though you have a high GDP and well-developed technology, every product has an opportunity cost. In other words, even though the product could be efficiently produced in your country, it would still make sense to get involved in international trade and buy this product from another country, because you might use the production effort and cost to produce another product that you can produce even more efficiently or that has a higher value.

Because of that, developed and developing countries are involved in international trade. The trading volume among countries with significant differences in culture, geography, politics, or religion is very high. This indicates that the trade is beneficial for all of them, despite their other differences.

International Trade Theory

The international trade theory is based on a very simple logic: trade is beneficial when countries focus on the products they can produce best.

What do we mean when we say that everybody specializes in "what they do best"? We mean comparative advantage, not absolute advantage. What if one country seems to be better at everything? Well, then we say that country has an absolute advantage.

Absolute advantage refers to a specific country's ability to produce more of a particular good than all other countries, although they use the same level of resources.

A country has an absolute advantage when producing more output with the same resources. Notice that a country that can produce the same amount of output with fewer resources also has an absolute advantage. Suppose a country can produce more output with the same resources. In that case, it is equivalent to say that for each unit of output, the country can produce it faster, with fewer people, or with fewer resources overall.

When we say that everyone should specialize in "what they do best," we do not mean they should specialize in what they have an absolute advantage in. They could have an absolute advantage in everything! When comparing two countries with two goods, each one has a comparative advantage ove one of the two goods.

Comparative advantage occurs when the opportunity cost of producing a particular good or service for one country is lower than for other countries. The same rule applies to individuals and companies.

For there to be gains from specialization and trade, each country should specialize in the good for which it has the lowest opportunity cost. The total amount of output that can be produced is increased in this way.

A country has a comparative advantage in a particular product or service when its opportunity cost of producing that product or service is lower than that of other countries.

International Trade Examples

Pursuing complete economic self-sufficiency is probably unrealistic in a modern and global world. Geographically, few countries possess enough natural resources to make all components of contemporary products.

Think about modern automobiles which require many metal alloys, rubber, plastic, glass, and various fabrics. Few nations have the resources to mass-produce all of these and make them cost-effectively. Therefore, it is easier to trade for these goods rather than rely on self-sufficiency.

Consider China and the United States as an example. China's comparative advantage over the United States comes in the form of cheap labor, which the United States cannot match. Chinese employees create basic consumer items at a lower opportunity cost than their counterparts in the United States. The reason for that is that China has a larger amount of unskilled labor compared to the U.S. That's why using this labor in the production of basic customer items doesn't come with much opportunity cost for China.

On the other hand, a specialized, high-skilled workforce is where the United States has a comparative advantage. American employees generate sophisticated items or investment possibilities at lower opportunity costs than their counterparts in China. Specializing and trading in this manner are beneficial to both parties: the U.S. and China.

International Trade US and China Trade Discussions StudySmarterUS and China Trade Discussions, Wikipedia Commons

International Trade Barriers

Tariffs and quotas are the main trade barriers in international trade.

Tariffs are taxes on imports. When a country imposes a tariff, that makes imports more expensive. Quotas are quantity limits on imports. When a country imposes a quota on a product, only a certain quantity of this product can be imported into the country.

There are generally two types of tariffs: protective tariffs and revenue tariffs. Protective tariffs aim to protect the less-efficient domestic industries and prevent these industries from being undersold by foreign industries. On the other hand, revenue tariffs aim to generate revenue for the government without prohibiting imports.

In addition to tariffs and quotas, there are other trade barriers as well. If the imported goods are foods, they are probably subject to some health inspections. Furthermore, some countries might require a license to import, and it may take time to report these licenses, which makes the process slow and becomes a barrier.

Nationalism, culture, or even geography might also be trade barriers: some countries prefer to trade within a nation or with neighboring countries due to cultural reasons (because they share more common values) or financial reasons (the trading costs generally increase as the distance among countries rises).

International Trade - Key takeaways

  • The exchange of goods and services among countries is called international trade. In a global world, trading between countries or consumers provides access to a wider spectrum of products and services.
  • The products and services that a country produces and sells to other countries are called exports. The products and services that a country buys from other countries are called imports.
  • Absolute advantage refers to a specific country's ability to produce more of a particular good than all other countries, although they use the same level of resources.
  • Comparative advantage occurs when the opportunity cost of producing a particular good or service for one country is lower than for other countries. The same rule applies to individuals and companies.
  • Tariffs are taxes on imports. When a country imposes a tariff, that makes imports more expensive. Quotas are quantity limits on imports. When a country imposes a quota on a product, only a certain quantity of this product can be imported into the country.

Frequently Asked Questions about International Trade

The exchange of goods and services among countries is called international trade.

The exchange of goods and services among countries is called international trade. In a global world, trading between countries or consumers provides access to a wider spectrum of products and services. 

Comparative advantage is the main factor in international trade and occurs when the opportunity cost of producing a particular good or service for one country is lower than for other countries. 

For there to be gains from specialization and trade, each country should specialize in the good for which it has the lowest opportunity cost. 


The variety of products and services, the fact that both trading partners gain from the trade and a more global and well-connected world.

Countries can be involved in international trade by exporting or importing products and services. The products and services that a country produces and sells to other countries are called exports. The products and services that a country buys from other countries are called imports. 

Final International Trade Quiz

Question

What is a trade deficit?

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Answer

It is when a country imports more goods than it exports.

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What is a trade surplus?

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Answer

It is when a country exports more goods than it imports.

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What is a current account?

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A current account represents a country's total exports and imports of goods, services, income, and capital transfers.

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What does a positive net export mean?

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Answer

A country is in a trade surplus

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What does a negative net export mean?

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A country is in a trade deficit

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What makes up the largest portion of the current account?

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Answer

Net exports

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What is the value of the dollar during a trade deficit?

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Answer

The value of the dollar is strong and will slowly become weaker

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True or False: A trade deficit may eventually become a trade surplus.

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Answer

True

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Question

The United States is in a trade surplus — what will happen to its currency?

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Answer

The currency will appreciate

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The United States is in a trade deficit — what will happen to its currency?

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Answer

The currency will depreciate

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Question

The United States imports 150,000 goods a year and exports 130,000 goods a year. What are net exports?

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Answer

–20,000

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The United States imports 180,000 goods a year and exports 220,000 goods a year. What are net exports?

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Answer

40,000

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True or False: A trade surplus may eventually become a trade deficit.

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Answer

True

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Question

Which country has a trade surplus but has been economically stagnant in recent years?

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Answer

Japan

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Question

What is International Trade?


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Answer

The exchange of goods and services among countries is called international trade.


Show question

Question

Why is international trade important?

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Answer

In a global world, trading between countries or consumers provides access to a wider spectrum of products and services. 


Show question

Question

What are the factors of international trade?


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Answer

Comparative advantage is the main factor in international trade and occurs when the opportunity cost of producing a particular good or service for one country is lower than for other countries. 



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Question

What do we need to have in order to have gains from trade?

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Answer

For there to be gains from specialization and trade, each country should specialize in the good for which it has the lowest opportunity cost. 


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What are the benefits of international trade?


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The variety of products and services, the fact that both trading partners gain from the trade, and a more global and well-connected world.


Show question

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What are the types of international trade?


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Answer

Countries can be involved in international trade by exporting or importing products and services. The products and services that a country produces and sells to other countries are called exports. The products and services that a country buys from other countries are called imports

Show question

Question

What does import mean?

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Answer

The products and services that a country buys from other countries are called imports. 

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What does export mean?

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Answer

The products and services that a country produces and sells to other countries are called exports.

Show question

Question

What are tariffs?

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Answer

Tariffs are taxes on imports. When a country imposes a tariff, that makes imports more expensive. 


Show question

Question

What are quotas?

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Answer

Quotas are quantity limits on imports. When a country imposes a quota on a product, only a certain quantity of this product can be imported into the country.  


Show question

Question

What is comparative advantage?

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Answer

Comparative advantage occurs when the opportunity cost of producing a particular good or service for one country is lower than for other countries. The same rule applies to individuals and companies. 

Show question

Question

What is absolute advantage?

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Answer

Absolute advantage refers to a specific country's ability to produce more of a particular good than all other countries, although they use the same level of resources.  

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Question

Give an example of a trade barrier? 

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Answer

In addition to tariffs and quotas, there are some health inspections or license requirements. 


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Question

What is economic self-sufficiency?

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Answer

If a country is self-sufficient, it has enough resources to make all components of contemporary products. 

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Question

A country has a comparative advantage in a particular product or service when its opportunity cost of producing that product or service is lower than that of other countries. 


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Answer

True

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