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.
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.
focused on the local or national marketplace.
In this chapter, our marketplace will be the
We divide our discussion of international economics into its major subdivisions,
(mainly dealing with the exchange of real goods and services across
national boundaries and their terms of trade) and
with the exchange of national currencies and their exchange rates).
Of course, there are differences between international and domestic trade—enough to
make international economics an important subdiscipline of the profession.
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
An intangible but significant factor is the difference in people’s attitudes
toward domestic and international trade—call international trade nationalism.
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.
much greater immobility of resources than commodities between nations. International
trade is the substitute for the international movement of human and property resources,
Understanding that trade is between people, not nations, is important for another
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.