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What is Global Trade? - Definition, Advantages & Barriers

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  • 0:00 Definition of Global Trade
  • 1:19 Advantages
  • 3:37 Barriers
  • 5:32 Lesson Summary
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Lesson Transcript
Instructor: Shawn Grimsley
Global trade of goods and services are worth trillions of dollars each year. In this lesson, you'll learn about global trade and its advantages, as well as barriers to trade. A short quiz follows.

Definition of Global Trade

Global trade, also known as international trade, is simply the import and export of goods and services across international boundaries.

Goods and services that enter into a country for sale are called imports. Goods and services that leave a country for sale in another country are called exports. For example, a country may import wheat because it doesn't have much arable land, but export oil because it has oil in abundance.

A fundamental concept underlying global trade is the concept of comparative advantage, developed by David Ricardo in the 19th century. In a nutshell, the doctrine of comparative advantage states that a country can produce some goods or services more cheaply than other countries. In technical terms, the country is able to produce a specific good or service at a lower opportunity cost than others.

An opportunity cost is the benefit one gives up in making an economic choice. The classic example is guns and butter - domestic investment over defense spending. The more guns you produce, the less funds are available to invest in public schools and infrastructure, for example. The more you invest in the domestic economy, the less you can spend on defense.

Advantages

Let's say that England produces more wheat per man-hour than Portugal, and Portugal produces more wine per man-hour than England. Consequently, England has a comparative advantage in producing wheat, and Portugal has a comparative advantage in producing wine. In other words, England's opportunity costs for the production of wheat is lower than for the production of wine, and Portugal's opportunity costs are lower for the production of wine than for the production of wheat. Thus, England is better off producing wheat, selling it to Portugal and buying its wine from Portugal. Portugal, on the other hand, is better off selling its wine to England and buying its wheat from England.

What can we learn from this example? Global trade allows for specialization and lower costs to consumers. Countries can focus on what they are best suited to do - engage in activities with the lowest opportunity costs for them. Focusing on their comparative advantages means they can maximize production and efficiency, which leads to greater potential for profit and economic growth.

Global trade can create economic wealth on a global scale as each country maximizes its revenue and growth by focusing on what it does best and saving money on imports that would be more costly for it to produce domestically. A country generates revenue from exporting the excess goods and services that its domestic market doesn't need to other countries that have a different comparative advantage. The money it receives from the exports can then be used to import goods and services it does not produce from the countries that have a comparative advantage in the production of those goods and services - just like England and Portugal trading wine and wheat, but on a global scale with countless products and services.

Global trade can also reduce international conflict and war. It may not make intuitive sense at first glance, but think about it for a moment. Global trade creates long-term mutually beneficial relationships or a symbiosis. If you start a war with someone who provides you needed goods, such as wheat or oil, you may have just shot yourself in the foot. In other words, global trade cultivates cooperation rather than conflict.

Barriers

A trade barrier is anything that hinders trade. You can generally divide barriers to trade into two categories: policy barriers and natural barriers.

Policy Trade Barriers

Policy trade barriers are barriers to trade intentionally imposed by national governments. Primary policy barriers include:

Tariffs, which are special taxes imposed on imported goods that make them more expensive. The purpose of a tariff is to make domestic goods that compete against imported goods more competitive.

Quotas limit the amount of imported goods that can enter a country within a certain period of time. Again, the intent is to make it easier for domestic companies to compete.

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