- When
individuals, regions and nations specialize in what they can produce
at the lowest cost and then trade with others, both production and
consumption increase. Voluntary exchange occurs only when all participating
parties expect to gain. Unlike your competitive experiences in sports
and games whereby one person wins and the others lose, voluntary exchange
is a win-win situation. As a result, free trade increases worldwide
material standards of living.
- Economic
specialization occurs when people concentrate their production on
fewer kinds of goods and services than they consume. Division of labor
occurs when the production of a good is broken down into numerous
separate tasks, with different workers performing each task. Specialization
and division of labor usually increase the productivity of workers,
thus, increasing their incomes (since incomes are based on productivity,
being productivity defined as output per worker)
- Greater
specialization leads to increasing interdependence among producers
and consumers. As a result, economic conditions and policies in one
nation increasingly affect economic conditions and policies in other
nations. Why? Voluntary exchange among people or organizations in
different countries gives people a broader range of choices in buying
goods and services.
- Like
trade among individuals within one country, international trade promotes
specialization and division of labor and increases output and consumption.
Two factors that prompt international trade are international differences
in the availability of productive resources and differences in relative
prices. Those factors establish that country's comparative advantage.
Individuals and nations have a comparative advantage in the production
of goods and services if they can produce a product at a lower opportunity
cost than other individuals or nations. Comparative advantage changes
over time because of changes in factor endowments, resource prices,
and events that occur in other nations.
- Despite
the mutual benefits from trade among people in different countries,
many nations employ trade barriers to restrict free trade for national
defense reasons or because some companies and workers are hurt by
free trade.
- Imports
are foreign goods and services that are purchased from sellers in
other nations. Exports are domestic goods and services that are sold
to buyers in other nations. A nation pays for its imports with its
exports.
- When
imports are restricted by public policies, consumers pay higher prices
and job opportunities and profits in exporting firms decrease. The
two most common forms of trade restrictions are quotas and
tariffs.
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