INTERNATIONAL ECONOMY

TRADE

● Trade is a basic economic concept involving the buying and selling of goods and services, with
compensation paid by a buyer to a seller, or the exchange of goods or services between parties.
EXAMPLES OF TRADE
An example of trade is when you give your friend your peanut butter sandwich in exchange for his tuna
sandwich.
An example of trade is when you give a greeting to your friend and get greeted in return.
● Trade can take place within an economy between producers and consumers.
● Trade is an act or process of buying, selling or exchanging goods and services. Trade, in general, is of
two types. They are Internal trade and International trade.

INTERNAL TRADE
● The goods produced in a country may be sold within the country or outside the country.
● Also called domestic trade or home trade
● Involves transactions between the producers, consumers and the middle men.

INTERNATIONAL TRADE
● An economic transaction that was made between the countries.
● The transactions are facilitated by international financial payments, in which the private banking
system and the central banks of the trading nations play important roles.

Other mean Int’l Trade

● the exchange of goods and services between countries.
● Trading globally gives consumers and countries the opportunity to be exposed to goods and services
not available in their own countries, or more expensive domestically.
● The importance of international trade was recognized early on by political economists such as Adam
Smith and David Ricardo.

ADAM SMITH- considered the father of modern economics

DAVID RICARDO- English economist who gave systematised, classical form to the rising science of
economics in the 19th century.

ECONOMY
● the wealth and resources of a country or region, especially in terms of the production and consumption
of goods and services.
● the large set of interrelated production and consumption activities that aid in determining how scarce
resources are allocated.
● In an economy, the production and consumption of goods and services are used to fulfil the needs of
those living and operating within it.
● Market-based economies tend to allow goods to flow freely through the market, according to supply
and demand.

UNDERSTANDING ECONOMY
- An economy encompasses all activity related to production, consumption, and trade of goods
and services in an area.
 - The economy of a particular region or country is governed by its culture, laws, history, and
geography, among other factors, and it evolves due to the choices and actions of the
participants. For this reason, no two economies are identical.

GOODS AND SERVICES

● Good is a tangible item that consumers desire or own. A service is not A tangible or physical entity but
is still sought after by consumers.
● Goods and services are the output of an economic system.
● Goods are tangible items sold to customers, while services are tasks performed for the benefit of the
recipients. Examples of goods are automobiles, appliances, and clothing. Examples of services are
legal advice, house cleaning, and consulting services. The output of a business can lie somewhere
between these two concepts. For example, a landscaping company could sell a homeowner a tree
(goods) and also mow the lawn (a service).

ACTORS
● Actors are entities that participate in or promote international relations. The two types of actors involved
in international relations include State and non-state actors. State actors represent a government while
non-state actors do not. However, they impact the state actors.
● actor is an individual or a collective entity capable of devising a personal strategy and acting
autonomously in order to achieve certain objectives (Crozier, Friedberg, 1992).
● a state actor is a person who is acting on behalf of a governmental body

STATE
● State institutions are those endorsed and supported by a central state, and part of the formal
state structure.
● an institution situated in a State or Territory with a Minister of State of which an agreement has
been entered into

NON-STATE
● Non-state institutions are those that operate outside of the formal support and endorsement of
the state structure, though they might be recognised to some extent within that formal structure.
● groups and organisations which operate outside the support of any state or government.

Economic actors are grouped into three categories, namely

individuals/households, firms, and the state. Among these actors only monetized transactions are considered.
The ultimate goal of the economy is defined as maximisation of individual income or financial wealth.

INDIVIDUALS/HOUSEHOLDS
● consists of one or several persons who live in the same dwelling and share meals. It may also consist
of a single family or another group of people.

FIRMS
● A firm is a business organization—such as a corporation, limited liability company, or partnership—that
sells goods or services to make a profit.

STATE
● a state is a community formed by people and exercising permanent power within a specified territory.

IMPORTANCE OF TRADE
Trade is essential for keeping a competitive global economy and lowers the prices of goods internationally as it
spurs innovation and encourages markets to become specialised. The ability to trade also allows access to
goods and services that might be of higher quality and lower cost than its domestic alternative.

● A trade occurs when two parties take part in buying or selling goods or services. The mechanism that
allows trade to occur is called a market. Trading occurs when a country exploits their abundance of
resources by exchanging its surplus for a resource that another country can provide.
● Trade is essentially the act of buying, selling or exchanging goods between two or more parties. To
guarantee a constant cycle of global trade, countries will enter trade agreements with other countries.
Trade agreements allow countries to boost their economy and bring in a surplus of resources that are
not locally available in abundance or at all. Trade is carried out by local exporters that will often
organise the transport of goods either via land, water or air. Continental trade is usually carried out by
land, which is the cheapest. Exporters will have to carry out continental/ international trade via boat or
plane; boats being the cheaper alternative.

What is the most important concept in international trade theory?

Comparative advantage is one of the most important concepts in economic theory and a fundamental tenet of
the argument that all actors, at all times, can mutually benefit from cooperation and voluntary trade. It is also a
foundational principle in the theory of international trade.

● Comparative advantage can contrast with absolute advantage. Absolute advantage leads to
unambiguous gains from specialization and trade only in cases wherein each producer has an absolute
advantage in producing some good. If a producer lacked any absolute advantage, then they would
never export anything. But we do see that countries without any clear absolute advantage do gain from
trade because they have a comparative advantage.
● The theory of comparative advantage has been attributed to the English political economist David
Ricardo. Comparative advantage is discussed in Ricardo's book On the Principles of Political Economy
and Taxation, published in 1817, although it has been suggested that Ricardo's mentor, James Mill,
likely originated the analysis and slipped it into Ricardo's book on the sly.
● The theory of comparative advantage helps to explain why protectionism has been traditionally
unsuccessful. If a country removes itself from an international trade agreement, or if a government
imposes tariffs, it may produce an immediate local benefit in the form of new jobs. However, this is
rarely a long-term solution to a trade problem. Eventually, that country will grow to be at a disadvantage
relative to its neighbors: countries that were already better able to produce these items at a lower
opportunity cost.

CHALLENGES OF TRADE
● Language Barriers.
● Cultural Differences.
● Managing Global Teams.
● Currency Exchange and Inflation Rates.
● Nuances of Foreign Politics, Policy, and Relations

LANGUAGE BARRIERS
● Language is needed for any kind of communication, even people with speech impairments
communicate with sign language and brail. Communication becomes difficult in situations where people
don’t understand each others’ language. The inability to communicate using a language is known as
language barrier to communication.
● Language barriers are the most common communication barriers which cause misunderstandings and
misinterpretations between people.
CULTURAL DIFFERENCES
● Cultural differences are the various beliefs, behaviors, languages, practices and expressions
considered unique to members of a specific ethnicity, race or national origin
● While these various differences can create a more vibrant office, they can also lead to more than a few
problems resulting from culture clash

MANAGING GLOBAL TEAMS

● Global teams often consist of employees who work remotely across different countries and time zones.
To maintain clear lines of communication and make contributors outside the office feel valued, it's
critical to hold regular meetings with them.

CURRENCY EXCHANGE AND INFLATION RATES

● The increase in the foreign exchange rate leads to the cheaper domestic goods for foreign consumers,
resulting in the increase of exports and total demands and prices. The increase in the foreign exchange
price raises the inflation rate.
NUANCES OF FOREIGN POLITICS, POLICY AND RELATIONS

IMPORTANCE OF REGIONAL INTEGRATION

Regional cooperation between developing countries is important in trade in order to improve transport facilities,
provide commercial information, and pool efforts in such areas as energy, water supply, research and
development, and knowledge generation can be crucial for the success of development strategies

● Regional integration helps countries overcome divisions that impede the flow of goods, services,
capital, people and ideas. These divisions are a constraint to economic growth, especially in
developing countries.
● Regional integration is the process by which two or more nation-states agree to co-operate and work
closely together to achieve peace, stability and wealth. ... This means that the integrating states would
actually become a new country — in other words, total integration.

PURPOSE
● Regional economic integration is a process in which two or more countries agree to eliminate economic
barriers, with the end goal of enhancing productivity and achieving greater economic interdependence