8.8 International Trade

Foreign Trade International trade is the exchange of goods and services across international boundaries or territories. In most countries, it represents a significant share of GDP. Industrialization, globalization, multinational corporations, and outsourcing are all having a major impact. Increasing international trade is basic to globalization.

Trade History Silk Road Amber Road Trade on the Silk Road was a significant factor in the development of the civilizations of China, India, Persia, Europe, and Arabia. Though silk was certainly the major trade item from China, many other goods were traded, and various technologies, religions and philosophies, as well as the Black Death, also traveled along the Silk Routes. The Amber Road was an ancient trade route for the transfer of amber. As one of the waterways and ancient highways, for centuries the road led from Europe to Asia and back, and from northern Africa to the Baltic Sea.

Industrialization Industrialization is the process in which a country transforms itself from a primarily agricultural society into one based on the manufacturing of goods and services. Individual manual labor is often replaced by mechanized mass production and craftsmen are replaced by assembly lines. Three major business figures emerged at the end of the 19th century. These "robber barons" were Andrew Carnegie in the steel industry, J.P. Morgan in the banking industry, and John Rockefeller in the oil industry.

Multinational Companies A multinational conglomerate is a company that involves at least 2 countries. Multinational corporations can have a powerful influence in international relations and local economies. Multinational corporations play an important role in globalization.

Examples of Multinational Companies

Downsizing Out-sourcing refers to American jobs being sent to other countries because they can produce items cheaper. North Carolina’s Furniture Industries Textile Industries

Globalization Globalization is the increasing interconnection of people and places as a result of advances in transport, communication, and information technologies that causes political, economic, and cultural cooperation. Economic globalization has had an impact on the worldwide integration of different cultures.

Global Interdependence Global Interdependence means that people and nations all over the world now depend on one another for many goods and services. It also means that what happens in one nation or region affects what happens in others. The United States must import half the oil we use, so we must maintain good relations with oil-producing countries. Other countries depend on the United States for computers, aircraft, and other high-tech products. Poorer countries look to the United States for food, medicine, and arms.

American and Chinese Interdependence

David Ricardo David Ricardo’s most important contribution was the law of comparative advantage, a fundamental argument in favor of free trade among countries and of specialization among individuals. The Ricardian model argued that there is mutual benefit from trade (or exchange) even if one party is more productive in every possible area than its trading counterpart , as long as each concentrates on the activities where it has a relative productivity advantage.

Comparative Advantage In economics, the principle of comparative advantage explains how trade is beneficial for all parties involved. Comparative advantage is a key economic concept in the study of trade.

Eli Heckscher and Bertil Ohlin The Heckscher–Ohlin model (H–O model) is a mathematical model of international trade, developed by Eli Heckscher and Bertil Ohlin. It builds on David Ricardo's theory of comparative advantage by predicting patterns of commerce and production based on the factor endowments of a trading region. The model essentially says that countries will export products that use their abundant and cheap factors of production and import products that use the countries' scarce factors. This is why the US imports much of its oil.

Leontief paradox Leontief's paradox in economics is that the country with the world's highest per capita GDP has a lower capital/labor ratio in exports than in imports. In 1954, Leontief found that the U.S. (the most capital-abundant country in the world) exported and imported goods from other countries creating an unfavorable balance of trade.

Gravity Model The gravity model of trade in international economics predicts bilateral trade flows based on the economic sizes of (often using GDP measurements) and distance between two countries.