Unfortunately, because of this, understanding the complexities of the real world is still more of an art than a science. Previous Section. Table of Contents. Next Section. Recognize that separate models of trade incorporate different motivations for trade. Reason for Trade 1: Differences in Technology Advantageous trade can occur between countries if the countries differ in their technological abilities to produce goods and services.
Reason for Trade 2: Differences in Resource Endowments Advantageous trade can occur between countries if the countries differ in their endowments of resources. Reason for Trade 3: Differences in Demand Advantageous trade can occur between countries if demands or preferences differ between countries.
Reason for Trade 4: Existence of Economies of Scale in Production The existence of economies of scale in production is sufficient to generate advantageous trade between two countries. Reason for Trade 5: Existence of Government Policies Government tax and subsidy programs alter the prices charged for goods and services.
Summary There are very few models of trade that include all five reasons for trade simultaneously. Key Takeaways The five main reasons international trade takes place are differences in technology, differences in resource endowments, differences in demand, the presence of economies of scale, and the presence of government policies. Each model of trade generally includes just one motivation for trade. Exercises List the five reasons why international trade takes place. The opposite of free trade is protectionism , in which a nation protects its home industries from outside competition by establishing artificial barriers such as tariffs and quotas.
The continued protests during meetings of the World Trade Organization and the protests during the convocations of the World Bank and the International Monetary Fund the three organizations are discussed later in the chapter show that many people fear world trade and globalization.
What do they fear? The negatives of global trade are as follows:. Sending domestic jobs to another country is called outsourcing , a topic you can explore in more depth. Many U. Now even engineering and research and development jobs are being outsourced. While intervention by President Trump did lead to jobs remaining in Indianapolis, Carrier informed the state of Indiana that it will cut workers from its Indianapolis factory. So is outsourcing good or bad? However, some economists say it leads to cheaper goods and services for U.
Also, it should stimulate exports to fast-growing countries. No one knows how many jobs will be lost to outsourcing in coming years. According to estimates, almost 2. A closer look reveals that globalization has been the engine that creates jobs and wealth. Benefits of global trade include the following:. Describe the policy of free trade and its relationship to comparative advantage. Why do people fear globalization?
What are the benefits of globalization? Summary of Learning Outcomes Why do nations trade? Nations trade because they gain by doing so. The principle of comparative advantage states that each country should specialize in the goods it can produce most readily and cheaply and trade them for those that other countries can produce most readily and cheaply. The result is more goods at lower prices than if each country produced by itself everything it needed. The major obstacles to international trade are natural barriers, tariff barriers, and non-tariff barriers.
Natural barriers to trade can be either physical or cultural. For instance, even though raising beef in the relative warmth of Argentina may cost less than raising beef in the bitter cold of Russia, the cost of shipping the beef from South America to Russia might drive the price too high. Distance is thus one of the natural barriers to international trade. Language is another natural trade barrier.
A tariff is a tax imposed by a nation on imported goods. No matter how it is assessed, any tariff makes imported goods more costly, so they are less able to compete with domestic products. Protective tariffs make imported products less attractive to buyers than domestic products. The United States, for instance, has often had protective tariffs on imports, such as some food and clothing. In March of the Trump administration added tariffs on steel and aluminum from most countries.
On the other side of the world, Japan imposes a tariff on U. With tariffs, they have under 2 percent of the market. In the United States, tariffs have been debated since The main arguments for tariffs include the following:. The main arguments against tariffs include the following:. Governments also use other tools besides tariffs to restrict trade.
One type of nontariff barrier is the import quota, or limits on the quantity of a certain good that can be imported. The goal of setting quotas is to limit imports to a specific amount of a given product. The United States protects its shrinking clothing industry with quotas. A complete list of the commodities and products subject to import quotas is available online at the U.
Customs and Border Protection Agency website A complete ban against importing or exporting a product is an embargo. Often embargoes are set up for defense purposes. For instance, the United States does not allow various high-tech products, such as supercomputers and lasers, to be exported to countries that are not allies. Although this embargo costs U. Government rules that give special privileges to domestic manufacturers and retailers are called buy-national regulations. One such regulation in the United States bans the use of foreign steel in constructing U.
Many state governments have buy-national rules for supplies and services. In a more subtle move, a country may make it hard for foreign products to enter its markets by establishing regulations that are different from generally accepted international standards, such as requiring bottles to be quart size rather than liter size.
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