Chapter 17 International

Chapter 17 International - CHAPTER 17 International Trade...

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CHAPTER 17 International Trade and Finance It can be of no consequence to America, whether the commodities she obtains in return for her own,, cost Europeans much, or little labor; all she is interested in, is that they shall cost her less labor by purchasing than by manufacturing them herself. David Ricardo ations never really trade; people do. This simple point is important, for international trade allows us to approach international trade as an extension of models already developed, rather than a completely new topic. Earlier discussion focused on the local or national marketplace. In this chapter, our marketplace will be the world. We divide our discussion of international economics into its major subdivisions, international trade (mainly dealing with the exchange of real goods and services across national boundaries and their terms of trade) and international finance (mainly dealing with the exchange of national currencies and their exchange rates). INTERNATIONAL TRADE Of course, there are differences between international and domestic trade—enough to make international economics an important subdiscipline of the profession. Some differences are obvious, like the many different national currencies, cultures, institutions, laws, languages, artificial barriers (tariffs, quotas, embargoes, health regulations), and countercyclical domestic policies, involved in international exchange. Others go largely unrecognized. An intangible but significant factor is the difference in people’s attitudes toward domestic and international trade—call international trade nationalism. As Abraham Lincoln is supposed to have said, “Domestic trade is among us; international trade is between us and them.” Yet people all over the world trade with each other for the same reason: They stand to gain from the transaction in spite of the politics. There is much greater immobility of resources than commodities between nations. International trade is the substitute for the international movement of human and property resources, especially people. Understanding that trade is between people, not nations, is important for another reason. If we focus solely on gains from trade to nations taken as unified political entities, we may overlook the distributional effects of international commerce—the gains and losses to individuals. As we will see, while international trade increases a nation’s total income, international trade reduces some individual’s incomes and increases others’. To evaluate objections to free trade among nations in proper perspective, we must recognize these hidden gains and losses. N
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Chapter 17 International Trade and Finance 2 Objections to free trade can be explained easily in terms of market theory. A major principle of economic theory is that each individual competitor has a vested interest in reducing competition. Competition forces product prices down and spurs product development and, in the long run, restricts business profits to only the risk-
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Chapter 17 International - CHAPTER 17 International Trade...

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