APMacro: International Trade

Why do nations trade? The easy answer is that nations possess different natural resources and build their industries based on their available resources. Nations develop land-intensive, labor-intensive, or capital-intensive industries—or a combination of such industries—based on their best available resources. They then trade for those products they cannot profitably produce themselves.

The benefits of international trade include a wider variety of products, greater output, greater efficiency in production, and a higher standard of living. The increased competition with foreign firms helps to deter monopolies and holds prices down in the marketplace. International connections help to promote peaceful solutions to political problems, rather than war.

While consumers and the nation may benefit from trade, less efficient domestic firms and their employees are hurt by the drop in domestic demand. Protectionists argue that trade barriers must be used to limit trade. Tariffs, quotas, non-tariff barriers, voluntary export restraints (VER), and export subsidies can all be used to protect domestic industries from foreign competition. The direct effects of these trade barriers include reduced consumption of goods, increased domestic consumption, a reduction in sales for foreign firms, and increased tariff revenue for the government. Indirect effects include a reduction in exports because of the reduced incomes of foreigners, the resulting cuts in output and employment in U.S. export industries, and a reduction in the efficiency of production. Studies of trade barriers have demonstrated that the increased costs to consumers are greater than the gains for domestic industries and the government.

1) Read Chapter 5.1-5.2 pp.65-94



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