international trade

International trade is the exchange of goods and services across international boundaries or territories. In most countries, it represents a significant share of GDP. While international trade has been present throughout much of history (see Silk Road, Amber Road), its economic, social, and political importance has been on the rise in recent centuries. Industrialization, advanced transportation, globalization, multinational corporations, and outsourcing are all having a major impact. Increasing international trade is basic to globalization".

Trade Series
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International trade
History of international trade
Free trade
Trade pact
Trade bloc
Preferential trading area
Free trade area
Customs union
Trade creation
Trade diversion
Monetary union
Common market
Economic and monetary union

International trade is also a branch of economics, which, together with international finance, forms the larger branch of international economics.

International trade theory

Several different models have been proposed to predict patterns of trade and to analyse the effects of trade policies such as tariffs.

Ricardian model

The Ricardian model focuses on comparative advantage and is perhaps the most important concept in international trade theory. In a Ricardian model, countries specialize in producing what they produce best. Unlike other models, the Ricardian framework predicts that countries will fully specialize instead of producing a broad array of goods. Also, the Ricardian model does not directly consider factor endowments, such as the relative amounts of labor and capital within a country.

Heckscher-Ohlin model

The Heckscher-Ohlin model was produced as an alternative to the Ricardian model of basic comparative advantage. Despite its greater complexity it did not prove much more accurate in its predictions. However from a theoretical point of view it did provide an elegant solution by incorporating the neoclassical price mechanism into international trade theory.

The theory argues that the pattern of international trade is determined by differences in factor endowments. It predicts that countries will export those goods that make intensive use of locally abundant factors and will import goods that make intensive use of factors that are locally scarce. Empirical problems with the H-O model, known as the Leontief paradox, were exposed in empirical tests by Wassily Leontief who found that the United States tended to export labor intensive goods despite having a capital abundance.

Specific Factors

In this model, labour mobility between industries is possible while capital is immobile between industries in the short-run. The specific factors name refers to the given that in the short-run specific factors of production, such as physical capital, are not easily transferable between industries. The theory suggests that if there is an increase in the price of a good, the owners of the factor of production specific to that good will profit in real terms. Additionally, owners of opposing specific factors of production (i.e. labour and capital) are likely to have opposing agendas when lobbying for controls over immigration of labour. Conversely, both owners of capital and labour profit in real terms from an increase in the capital endowment. This model is ideal for particular industries. This model is ideal for understanding income distribution but awkward for discussing the pattern of trade.

Gravity model

The Gravity model of trade presents a more empirical analysis of trading patterns rather than the more theoretical models discussed above. The gravity model, in its basic form, predicts trade based on the distance between countries and the interaction of the countries' economic sizes. The model mimics the Newtonian law of gravity which also considers distance and physical size between two objects. The model has been proven to be empirically strong through econometric analysis. Other factors such as income level, diplomatic relationships between countries, and trade policies are also included in expanded versions of the model.

Regulation of international trade

Traditionally trade was regulated through bilateral treaties between two nations. For centuries under the belief in Mercantilism most nations had high tariffs and many restrictions on international trade. In the 19th century, especially in Britain, a belief in free trade became paramount and this view has dominated thinking among western nations for most of the time since then which led to the general decline of Great Britain. In the years since the Second World War, controversial multilateral treaties like the GATT and World Trade Organization have attempted to create a globally regulated trade structure. These trade agreements have often resulted in protest and discontent with claims of unfair trade that is not mutually beneficial.

Free trade is usually most strongly supported by the most economically powerful nations, though they often engage in selective protectionism for those industries which are strategically important such as the protective tariffs applied to agriculture by the United States and Europe. The Netherlands and the United Kingdom were both strong advocates of free trade when they were economically dominant, today the United States, the United Kingdom, Australia and Japan are its greatest proponents. However, many other countries (such as India, China and Russia) are increasingly becoming advocates of free trade as they become more economically powerful themselves. As tariff levels fall there is also an increasing willingness to negotiate non tariff measures, including foreign direct investment, procurement and trade facilitation. The latter looks at the transaction cost associated with meeting trade and customs procedures.

Traditionally agricultural interests are usually in favour of free trade while manufacturing sectors often support protectionism. This has changed somewhat in recent years, however. In fact, agricultural lobbies, particularly in the United States, Europe and Japan, are chiefly responsible for particular rules in the major international trade treaties which allow for more protectionist measures in agriculture than for most other goods and services.

During recessions there is often strong domestic pressure to increase tariffs to protect domestic industries. This occurred around the world during the Great Depression leading to a collapse in world trade that many believe seriously deepened the depression.

The regulation of international trade is done through the World Trade Organization at the global level, and through several other regional arrangements such as MERCOSUR in South America, NAFTA between the United States, Canada and Mexico, and the European Union between 27 independent states. The 2005 Buenos Aires talks on the planned establishment of the Free Trade Area of the Americas (FTAA) failed largely due to opposition from the populations of Latin American nations. Similar agreements such as the MAI (Multilateral Agreement on Investment) have also failed in recent years.

Risks in international trade

The risks that exist in international trade can be divided into two major groups:

Economic risks

  • Risk of insolvency of the buyer,
  • Risk of protracted default - the failure of the buyer to pay the amount due within six months after the due date
  • Risk of non-acceptance
  • Surrendering economic sovereignty
  • risk of Exchange risk

Political risks

  • Risk of cancellation or non-renewal of export or import licences
  • War risks
  • Risk of expropriation or confiscation of the importer's company
  • Risk of the imposition of an import ban after the shipment of the goods
  • Transfer risk - imposition of exchange controls by the importer's country or foreign currency shortages
  • Surrendering political sovereignty

See also

External links


gross domestic product, or GDP, is one of the ways for measuring the size of its economy. The GDP of a country is defined as the total market value of all final goods and services produced within a country in a given period of time (usually a calendar year).
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Silk Road, or Silk Route, is an interconnected series of ancient trade routes through various regions of the Asian continent, mainly connecting Chang'an (today's Xi'an) in China, with Asia Minor and the Mediterranean. It extends over 8,000 km (5,000 miles) on land and sea.
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The Amber Road (Czech: Jantarová stezka; German: Bernsteinstraße; Hungarian: Borostyánút; Italian:
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Industrialisation (also spelt Industrialization) or an Industrial Revolution is a process of social and economic change whereby a human group is transformed from a pre-industrial society (an economy where the amount of capital accumulated per capita is low) to an
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Transport or transportation is the movement of people and goods from one place to another. The term is derived from the Latin trans ("across") and portare ("to carry").
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Globalization (or Globalisation
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A multinational corporation (MNC) is a corporation or enterprise that manages production establishments or delivers services in at least two countries. Very large multinationals have budgets that exceed those of many countries.
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worldwide view of the subject.
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Outsourcing became part of the business lexicon during the 1980s and refers to the delegation of non-core operations from internal production to an external
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Globalization (or Globalisation
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history of international trade chronicles notable events that have affected the trade between various countries.

In the era before the rise of the nation state, the term 'international' trade cannot be literally applied, but simply means trade over long distances; the sort
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Free trade is a market model in which trade in goods and services between or within countries flow unhindered by government-imposed restrictions. Restrictions to trade include taxes and other legislation, such as tariff and non-tariff trade barriers.
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Protectionism is the economic policy of restraining trade between nations, through methods such as tariffs on imported goods, restrictive quotas, a variety of restrictive government regulations designed to discourage imports, and anti-dumping laws in an attempt to protect domestic
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Economic policy
Monetary policy
Central bank   Money supply
Fiscal policy
Spending   Deficit   Debt
Trade policy
Tariff   Trade agreement

Financial market
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trade bloc is a large free trade area formed by one or more tax, tariff and trade agreements. Typically trade pacts that define such a bloc specify formal adjudication bodies, e.g. NAFTA trade panels.
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Preferential Trade Area is a trading bloc which gives preferential access to certain products from certain countries. This is done by reducing tariffs, but does not abolish them completely.
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free trade area is a designated group of countries that have agreed to eliminate tariffs, quotas and preferences on most (if not all) goods between them.

It can be considered the second stage of economic integration.
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customs union is a free trade area with a common external tariff. The participant countries set up common external trade policy, but in some cases they use different import quotas. Common competition policy is also helpful to avoid competition deficiency.
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Trade creation is an economic term related to international economics in which trade is created by the formation of a customs union.

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Trade diversion is an economic term related to international economics in which trade is diverted from a more efficient exporter towards a less efficient one by the formation of a free trade agreement.
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monetary union is a situation where several countries have agreed to share a single currency (also known as a unitary or common currency) among them, for example, the East Caribbean dollar.
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economic and monetary union is a single market with a common currency. It is to be distinguished from a mere currency union (e.g. the Latin Monetary Union in the 1800s), which does not involve a single market.

This is the fifth stage of economic integration.
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Economics is the social science that studies the production, distribution, and consumption of goods and services. The term economics comes from the Greek for oikos (house) and nomos (custom or law), hence "rules of the house(hold).
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International finance is the branch of economics that studies the dynamics of exchange rates, foreign investment, and how these affect international trade.

See also

  • International Finance Corporation
  • Interest rate parity

External links

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International economics is a branch of economics with three main subdisciplines international trade, monetary theory and international finance.
  • International trade is a study of the exchange of goods and services across international boundaries.

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David Ricardo was born in 1772 and made a fortune by later becoming a stockbroker and loan broker (Henderson 826, Fusfeld 325). At the age of 27, he read An Inquiry into the Nature and Causes of Wealth of Nations by Adam Smith and was energized by the theories of economics.
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In economics, David Ricardo is credited for the principle of comparative advantage to explain how it can be beneficial for two parties (countries, regions, individuals and so on) to trade if one has a lower relative cost of producing some good.
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Trade is the voluntary exchange of goods, services, or both. Trade is also called commerce. A mechanism that allows trade is called a market. The original form of trade was barter, the direct exchange of goods and services.
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The word theory has a number of distinct meanings in different fields of knowledge, depending on their methodologies and the context of discussion.

In common usage, people often use the word theory to signify a conjecture, an opinion, or a speculation.
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The Heckscher-Ohlin model (H-O model) is a general equilibrium mathematical model of international trade, developed by Eli Heckscher and Bertil Ohlin at the Stockholm School of Economics.
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FACTOR (the Foundation to Assist Canadian Talent on Records) is a "private non-profit organization, ... dedicated to providing assistance toward the growth and development of the Canadian independent recording industry" (from their website ).
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