International Trade

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International Trade

Most economists believe in free trade - the movement of goods between countries in the absence of harsh restrictions placed upon this exchange. The comparative cost principle is that countries should produce whatever they can make the most cheaply. Countries will raise their living standards and income if they specialize in the production of the goods and services in which they have the highest relative productivity: the amount of output produced per unit of an input (e.g. raw material, labor). Specialization is a situation that occurs when individuals or businesses produce a narrow range of products. Countries can have an absolute advantage - so that they are the cheapest in the world, or a comparative advantage - so that they are only more efficient than some other countries in producing certain goods or services. This can be because they have raw materials, a particular climate, qualified labor (skilled workers), and economies of scale - reduced production costs because of large-scale production.

Balance of payments
Imports are goods or services bought from a foreign country. Exports are goods or services sold to a foreign country. A country that exports more goods than it imports has a positive balance of trade or a trade surplus. The opposite is a negative balance of trade or a trade deficit. Trade in goods is sometimes called visible trade (AmE: merchandise trade). Services such as banking, insurance and tourism are sometimes called invisible imports and exports. Adding invisibles to the balance of trade gives a country's balance of payments.

Government, unlike most economists, often wants to protect various areas of the economy. These include agriculture - so that the country is certain to have food - and other strategic industries that would be necessary if there was a war and international trade became impossible. Governments also want to protect other industries that provide a lot of jobs. Many...
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