Trade among countries serves many functions aside from the exchange of goods and services at a global level. For instance, trade facilitates movements of foreign currencies held in a country’s bank because imports are paid in the unit of the exporting country’s currency. Additionally, trading partners have more and a greater variety of goods available to them. In short, those gains from trade arise out of comparative advantage, specialization, and export activities.

However, international trade can become and often is an emotionally or politically charged issue that cuts across microeconomics and macroeconomics; it is probably a good time now to recall the difference between them. Nonetheless, most of the content here centers on the topic from an economic perspective and directs attention to factors such as trade balances, exchange rates, and other aspects of a country’s macroeconomic performance.

Objectives

Upon successful completion, you will be able to:

• compare and contrast and discuss absolute advantage and comparative advantage;
• explain how the foreign exchange market works, how it reflects changes in the demand for or the supply of a country’s currency, and how it relates to a country’s net exports;
• identify tariffs and quotas in international trade and how they relate to net exports;
• explain how comparative advantage relates to the gains from international trade; and
• describe the role of international trade in the exchange of currencies.