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understand international trade The Investor’s Guide

Guide to Global Trade

understand international trade The Investor’s Guid

Trade International trade was important to the rise of the world cheap. In the global economy, supply and demand—and so prices—influence and are influenced by global events.

Political changes in Asia, for example, could lead to rising labor costs. This could increase the cost of manufacturing for an American sneaker company based in Malaysia, which would then result in an increase in the price of a pair of sneakers that an American consumer might buy at their local mall.

Imports And Exports

A product sold on the world market is called an export and a product purchased on the world market is an import. Imports and exports are recorded in the current account section of a country’s balance of payments.

World trade allows rich countries to use their resources, such as labor, technology, or capital, more efficiently. Different countries are able with different assets and natural resources: land, labor, capital, technology, etc.

This allows some countries to crop the same good more efficiently; in other words, faster and cheaper. Therefore, they can sell it inexpensive than other republics. If a country cannot produce an item efficiently, it can get it by interchange with another country that can. This is known as specializing in worldwide trade.

Comparative Advantage

For example, England and Portugal have factually been used in Adam Smith’s Wealth of Nations to illustrate how two countries can benefit from each other by specializing and acting on their own comparative advantages.


In such examples, Portugal is said to consume abundant vineyards and be able to produce wine cheaply, while England is said to be able to produce cloth cheaper since its pastures are full of sheep.


Rendering to the theory of comparative advantage, each country would eventually recognize these facts and stop producing the product that was most expensive to produce domestically, and instead engage in trade. In fact, in time, England would probably stop producing wine and Portugal would stop making cloth. Both countries would realize that it would be to their advantage to redirect their efforts to produce what they were relatively better at domestically and instead trade with each other to get the other.

These two countries understood that they could produce more if they focused on those products in which they had a comparative benefit. In such a case, the Lusitanian would begin to crop only wine and the English language only cotton.

Each republic can now make a specialized production of 20 units per year and market equal parts of both products. Thus, each country now has access to both products at a lower cost. So we can see that for both countries the opportunity cost of producing both products is greater than the cost of specializing.

Other Potential Benefits Of Global Trade

International trade not only leads to greater efficiency, but also allows countries to participate in a global economy, which fosters opportunities for foreign direct investment (FDI). In philosophy, economies can grow more efficiently and develop more modest economic players.


For the host government, foreign direct investment is a means by which foreign exchange and expertise can enter the country. It increases the level of employment and theoretically leads to growth in gross domestic product (GDP). For the investor, FDI offers business expansion and growth, which means higher income.

Free Trade Vs Protectionism

As with all theories, there are opposite views. International trade has two opposite views on the level of control imposed on trade between countries.

Free Trading

Free trade is the humbler of the two philosophies. This approach is sometimes called laissez-faire economics. With a laissez-faire approach, there are no business restrictions. The main impression is that supply and demand factors acting on a global scale ensure that production is efficient. Therefore, nothing should be done to defend or encourage trade and growth, as market forces will do this automatically.


Protectionism holds that regulating international trade is important to ensure that markets function properly. Proponents of this theory believe that the inefficiencies of the market outweigh the benefits of investment.

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