International Trade - DefinitionInternational Trade - Definition
International trade involves the
exchange of goods or services between
This is described in terms of
– ExportsExports: the goods and services: the goods and services soldsold in foreignin foreign
– ImportsImports: the goods or services: the goods or services boughtbought fromfrom
foreign producers.foreign producers.
Free Trade vs. Trade BarriersFree Trade vs. Trade Barriers
Nations can trade freely with each other
or there are trade barriers.
– Free Trade: Nothing hinders or gets in the
way from two nations trading with each
– Trade Barriers: Trade is difficult because
things get in the way.
There are costs and benefits related to
free trade as well as trade barriers.
Free Trade - BenefitsFree Trade - Benefits
When nations specialize and trade, total world outputWhen nations specialize and trade, total world output
or sales is increased.or sales is increased.
Companies can produce for foreign markets as wellCompanies can produce for foreign markets as well
as domestic markets (markets in the home country).as domestic markets (markets in the home country).
This means there is potential for making more moneyThis means there is potential for making more money
as there are more markets to sell goods or servicesas there are more markets to sell goods or services
More variety of goods are available from a worldMore variety of goods are available from a world
market than just a domestic market.market than just a domestic market.
Prices of goods are decreased through increasedPrices of goods are decreased through increased
Free Trade - CostsFree Trade - Costs
The domestic (home) country can lose money
because the foreign goods allowed into the
market increase competition and make it less
likely people will buy domestic products.
– Example: In the U.S., people might want to buy a
foreign automobile like a Honda or Toyota instead
of an American made car.
Increased competition means lower prices.
Less money will go into the domestic market
place and this can cause factories to be
closed and jobs to be eliminated.
Trade Barriers – Three TypesTrade Barriers – Three Types
Barriers to trade are things that hinder or get
in the way of trading.
They can be cultural, physical , or economic.
– Cultural barriers: language,
currency, belief system.
– Physical barriers: mountains, rivers, etc.
• Example: The Alps Mountains in Europe
– Economic barriers: government rules that
restrict, block or discourage international trade
Trade Barriers - EconomicTrade Barriers - Economic
The most common trade restrictions
– tariffs, which are taxes on imports.
– quotas, which are limits on the quantity
that can be imported.
– embargos, which are a complete trade
block usually for political purposes.
AA tarifftariff is a tax put on goods imported from abroadis a tax put on goods imported from abroad
and sometimes referred to as custom duties.and sometimes referred to as custom duties.
It is the most used and most familiar type of tradeIt is the most used and most familiar type of trade
The effect of a tariff is to raise the price of theThe effect of a tariff is to raise the price of the
imported product.imported product.
It makes imported goods more expensive so thatIt makes imported goods more expensive so that
people are more likely to purchase domesticpeople are more likely to purchase domestic
The money received from the tariff is collected by theThe money received from the tariff is collected by the
domestic government.domestic government.
AA quotaquota is a limit on the amount of goods that can beis a limit on the amount of goods that can be
Putting a quota on a good creates a shortage, whichPutting a quota on a good creates a shortage, which
causes the price of the good to rise and makes thecauses the price of the good to rise and makes the
imported goods less attractive for buyers. Thisimported goods less attractive for buyers. This
encourages people to buy domestic products.encourages people to buy domestic products.
A quota on shoes, for example, might limit foreign-A quota on shoes, for example, might limit foreign-
made shoes to 10,000,000 pairs a year. If Americansmade shoes to 10,000,000 pairs a year. If Americans
buy 200,000,000 pairs of shoes each year, this wouldbuy 200,000,000 pairs of shoes each year, this would
leave most of the market to American producers.leave most of the market to American producers.
Embargoes are a government order
which completely prohibits trade with
If necessary, the military actually sets
up a blockade to prevent movement of
merchant ships into and out of shipping
Embargoes (con’t)Embargoes (con’t)
The embargo is the harshest type of
trade barrier and is usually enacted for
political purposes to hurt a country
economically and thus undermine the
political leaders in charge.
Such was the case with the Cuban
embargo which has been in place since
Trade Barriers - BenefitsTrade Barriers - Benefits
Most barriers to trade are designed to prevent
imports from entering a country.
Trade barriers provide many benefits:
– protect homeland industries from competition
– protect jobs
– help provide extra income for the government.
– Increases the number of goods people can choose
– Decreases the costs of these goods through
Trade Barriers - CostsTrade Barriers - Costs
Tariffs increase the price of imported
Less competition from world markets
means there is an increase in the price.
The tax on imported goods is passed
along to the consumer so the price of
imported goods is higher.