Table of Contents
- Global Trade Definition
- Benefits of International Trade
- Types of Trade Barriers
- Global Trade Examples
- Lesson Summary
The meaning of trade is the exchange of products. Global trade definition is the exchange of products between international borders. It is the lifeblood of the world economy since it allows different countries to expand their markets and help in the availability of products that may not be available domestically. As a result, the market faces high competition. But what role does competition play in international trade? Competition results in more competitive pricing due to the availability of both domestic and foreign products, which eventually brings the product to a lower price. Global trade, also known as international trade, works through a flow of huge complex supply chains between the countries that source raw materials, to the countries that manufacture the raw materials, and later to the consumer nation, which is the nation that puts the final product to use. When a change occurs in one supply chain link, say an increase in the metal price in the production stage, the change affects all the supply chain stages. The exchange products in international trade can either be exports or imports. Import refers to the products that are brought to the local nation. On the other hand, exports refer to products sold to a foreign nation. Global trade occurs mainly because one nation enjoys a comparative advantage in manufacturing particular products, which means the production cost is lower for that country than for another.
Comparative advantage is one of the theories of international trade. The meaning of comparative advantage is the capacity that a certain nation has in manufacturing a particular product at a lower opportunity cost than other countries. An opportunity cost refers to the profit lost when one alternative is selected over another.
Countries normally have a comparative advantage in various industries and for different reasons in global trade. For example, Italy is skilled at making both chocolate and cheese. In order to know which of the two products Italy has a comparative advantage in, the country needs to evaluate and determine how much work goes into the production of each good. Suppose one hour produces 20 units of cheese, and the same duration of an hour is used to produce 40 units of chocolate. In that case, it is safe to say that Italy has a comparative advantage in making chocolates.
David Ricardo, an economist, was the developer of the theory of comparative advantages in the 1800s. He argued that the best way that a country could boost its economic growth is by putting its whole focus on the industry it has the biggest comparative advantage. At that time, Ricardo explains that England was able to make cloth at a lesser cost, and Portugal had the appropriate conditions to make cheap wine. Consequently, he predicted that eventually, both countries would recognize these facts, Portugal would stop making cloth, and England would cease making wine. Instead, Ricardo suggested that both countries would start trading with each other for the products they were less efficient at producing. He was correct. England made more revenue by trading its cloth for the wine made in Portugal and vice versa.
Comparative advantage plays a huge impact by allowing specialization in international trade. Countries can determine which products they will each specialize in through comparative advantage. For example, a country might choose to specialize in making coffee beans, giving the country a competitive advantage. It also gives the specific country the ability to produce high-quality coffee beans in large numbers while using the resources available in the country.
There are numerous benefits of international trade, such as economic growth, reduction of international conflict, and specialization.
International trading is primary to reducing worldwide poverty because it helps open vast job opportunities. Countries that participate in global trading tend to grow faster and improve productivity and innovation. This is because international trade leads to the development of new industries in order to meet demands in different countries.
Global trade leads to the development and establishment of peaceful relations between countries. It also creates understanding, cooperation, and cordial relationships among different countries. When people from different countries come in contact with each other, the commercial mixing between them encourages the exchange of culture and ideas.
Global trading leads to specialization and promotes the production of different products from various countries. This means that goods can be produced at a relatively low rate due to the division of labor.
Global trading increases the number of product choices the domestic market can choose from while also decreasing the cost of the products due to increased competition. While this is beneficial, it is argued that the world trade market is not beneficial to all parties. International trade is helpful to both the government and businesses as long as no one puts trade barriers. Trade barriers refer to government-induced restrictions on global trade. There are three types of trade barriers: tariffs, natural barriers, and nontariff barriers.
Natural trade barriers are barriers imposed by cultural or natural clashes between the countries. Natural trade barriers include informational asymmetry and geographical barriers such as mountains. For instance, a country like Afghanistan is surrounded by mountains on its eastern side. Because of the high cost of aerial shipment and the lack of natural harbors, the only way to enter the country is by road. For countries like India and China that are to the east of Afghanistan, crossing the mountain and getting into the country is an arduous task. Even in a case where transport is made easier, the problem of existence still exists. This is because for trade to be profitable, the company must be able to produce products and transport them at a lower cost than the domestic producer. Another barrier is the cultural barrier. When countries with different cultures and languages interact, there is bound to either misinterpretation or confusion.
A tariff refers to a tax imposed on imported goods. A tariff can either be imposed on a specific commodity or country. This is the most common way of setting trade barriers to another country. Tariff falls under the government policy called Protectionism. Protectionism is a government policy that is used to prevent foreign competition.
Nontariff barriers refer to other trade restrictions that are not tariffs. They include product standards and quotas. Import quotas refer to the government policy that allows only a certain amount of a specific commodity to be imported. For example, if a country only allows 2,000 metric tons of maize to be imported, the country is said to have an import quota.
There are various international trade examples, such as
The global trade definition is the selling and buying of goods and services through international borders. Another name for global trade is international trade. International trade is beneficial because different countries have different comparative advantages. The meaning of comparative advantage is the power that a particular nation has in manufacturing a certain product at a lower opportunity cost than a different country. This means that the production cost of producing a particular product is cheaper in a particular country than it is in another. Comparative advantage is one of the theories of international trade that was developed by an economist called David Ricardo. He explained that a country is more likely to grow economically by focusing on the product it has a greater comparative advantage and then trading it with a product it is less efficient at producing. Apart from economic growth, some of the other advantages of international trade are specialization and the reduction in international conflicts. Global trade is beneficial, especially in countries with no trade barriers. The three types of trade barriers are tariffs, nontariff barriers, and natural barriers.
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The two types of trade are external trade and internal trade. Internal trade refers to the exchange of products within the same country. External trade is the exchange of products from one country to another.
International trade is the exchange of goods between nations. International trading is important because it gives different countries the chance to get different products from local and international markets.
The three benefits of international trade include specialization, economic growth, and the reduction of conflicts between countries. International trade promotes understanding and cooperation between countries that trade together.
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