UNIT 1

International trade

Every country in the world trades with other countries. A lot of things we consume come from foreign lands. We are able to enjoy them because we are part of a global economy. Every nation's economy heavily depends upon foreign trade for satisfying the needs of its population, and providing markets for its products.

Terms to remember:

export import

absolute advantage comparative advantage

protectionism exchange rate

quota tariff duty

embargo subsidies

economic union economic independence

Nations trade with each other for the same reason that business companies and individuals within a domestic trade: they expect to have profit. They benefit because trade permit them to have things they need and to exchange their surplus goods and services.

Some countries have unique climate or soils, others have valuable raw materials, skilled labour forces or favourable geographic situation. Because of a lack of natural resources, most nations are not capable to produce certain goods or cervices. For instance, Colombia has the right climate to grow coffee beans or Morocco has the suitable conditions for producing bananas. Ukraine is incapable to do this because of unsuitable climate. So, coffee and bananas are an important export product for Colombia and Morocco and an important import for Ukraine.

Another example for the importance of overseas trade is a supply of raw materials. For some countries raw materials are major imports. Most of the countries in Western Europe must import oil. They lack this product which is an important source of energy for the industries.

A country that has many skilled workers can produce complex goods such as computers or electric generators, etc. A lot of engineering or scientific equipment are exported but without skilled workers it would be impossible.

Nations will gain because of differences in terms of climate, natural resources, labour force skills and technology. These special conditions give one country an advantage over others in production of certain goods or services.

A country which has the ability to produce a product at a lower cost than the other country is said to have an absolute advantage in making that item. For example the USA has an absolute advantage in the production of computers, Brazil has an absolute advantage in growing coffee beans.

A country that has the ability to produce a product relatively more efficiently than another, is said to have a comparative advantage. The law of comparative advantage explains why nations specialize of those goods and services in which they have the greatest comparative advantage or relative efficiency, and exchange their surplus for the things they need.

International trade allows countries to specialize in the goods and services that they produce best, satisfying their other needs by importing commodities that they do not produce themselves.