• Most countries believe in free trade – that people and companies should be able to buy goods from all countries, without any barriers when they cross frontiers.
• The comparative cost principle is that countries should produce whatever they can make the most cheaply. Countries will raise their living standards and income if they specialize in the production of the goods and service sin which they have the highest relative productivity: the amount of output produced per unit of an input (e.g. raw material, labour).
• Countries can have an absolute advantage – so that they are the cheapest in the world, or a comparative advantage – so that they are only more efficient than some other countries in producing certain goods and services. This can be because they have raw materials, a particulat climate, qualified labour (skilled workers), and economies of scale – reduced production costs because of large-scale production.
• Measuring and analyzing global trade: When analyzing trade, important concepts are:

1. Balance of trade (BrE) (merchandise trade AmE). This is the difference between a nation’s import and exports. If a country exports more to its trading partners than it imports, then it has a ’trade surplus’. Otherwise it has a ’trade deficit’.
2. Balance of payments. This is a much wider measure – it includes imports and exports of goods as above, but also includes services and investments.
3. Exchange rates. Currencies (dollars, euros, yen, etc.) fluctuate against each other according to supply and demand. If the value of a currency falls, exports increase (because they become chepaer for overseas customers) and foreign investment is stimulated (because domestic assets are cheaper for foreigners). On the other hand, imported goods become more expensive, and consumers feel this as a drop in their living standards.

International organizations that promote trade

• WTO (World Trade Organization) works towards reducing tariffs and quotas, mediates in trade disputes
• The only way a country is allowed to try to restrict imports is by imposing tariffs.
• Countries should not use import quotas – limits to the number of products which can be imported – or other restrictive measures.
• Various international agreements forbid dumping – sellign goods abroad at below cost price in order to destroy or weaken competitors or to earn foreign currency to pay for necessary imports.
• MF (International Monetary Fund) makes short-term loans to countries that cannot pay debts
• World Bank: lends money to developing countires, particularly for infrastructure projects
• NAFTA, EU, ASEAN: regional blocks that promote economic integration

 Video 1: Investopedia – Explaining Comparative Advantage

 Video 2: Investopedia – Absolute advantage

Compare the two examples from the videos!