Econ 212 Principles of Economic
Intro
What is International Trade? What are the limitations and advantages of free trade? We will answer these questions as well as exploring comparative and absolute advantage, and the influences affecting foreign exchange rates. We will also explain the purpose of the World Trade Organization (WTO), and give an example of a current trade topic.
International Trade is the exchanging of goods and services between two separate nations. If a nation did not participate in free trade, it would be limited to only the goods and services it could produce. By participating in free trade, a nation opens itself to an increased variety of goods and services, lower costs of goods, increased competition, and allows new technologies to be introduced. In order to evaluate whether to import goods (bring goods and services in from other countries) or to export goods (send goods and services to other countries), the nation needs to consider their goods and services domestic price without trade to the world price. If the domestic price is lower than the world price, then the nation is at a comparative advantage in its production of that good or service. When a nation is at a comparative advantage with a product, it will become an exporter of that product to other nations. Domestic producers of a good that is being exported are at an advantage because it allows them to sell their product at a higher price. Domestic consumers of that good are at a disadvantage because they will pay more for the good. The opposite is true if the domestic price is higher than the world price. In this scenario, the nation would import the good, because the rest of the world would be at a comparative advantage. Domestic consumers of a good that is being imported are at an advantage because the competition forces the price lower. Domestic producers of an imported good are at a disadvantage because they will have to sell at a lower price. In order to...