Unit 3: International Trade
So far, we have explored how the rise of globalization and the influence of language and culture play a pivotal role in developing the modern world. As the global economy has become more integrated and connected, we have seen an expansion of international trade and opportunities for companies to expand into new markets. This unit will highlight international trade and discuss the trends that are shaping how the global economy evolves.
Completing this unit should take you approximately 4 hours.
Upon successful completion of this unit, you will be able to:
- assess how country specific infrastructure and partnerships support international trade;
- examine International Trade Theory and interpret the various elements of it; and
- explain why some nations develop trade surpluses or deficits with other countries and evaluate whether the outcome is positive or negative for each country.
3.1: Classical Theories of International Trade
As you read this section, think about the products or services you use daily that are possible due to international trade. How would you have to adapt if governments began to restrict international trade?
Mercantilism is an economic policy that attempts to maximize exports while minimizing imports. Every country implements mercantilist policies to some degree. A country that exports more than it imports has a trade surplus, while a country that imports more than it exports has a trade deficit. Read this section, which gives a background on how mercantilist policies have shaped international trade.
- Read this article on the difference between free trade policies and mercantilism. How has free trade developed over time? Why have mercantilist policies fallen out of favor as international trade has expanded?
In trade, absolute advantage is when a country can produce a greater quantity of a good or service with the same input (typically labor) at a lower cost. The theory of absolute advantage was developed by the Scottish economist Adam Smith in his book The Wealth of Nations.
Comparative advantage is a theory developed by the English political economist David Ricardo in his book On the Principles of Political Economy and Taxation. Comparative advantage, also called Ricardian advantage, describes one country's ability to produce a good or service at a lower opportunity cost than another country. Opportunity cost is the idea that making and selling one product or service is a trade-off, since you forfeit the opportunity to produce another product instead.
Read this section and answer the questions at the end.
3.2: Modern Theories of International Trade
Countries with similar economies are more likely to trade with one another, especially if they are at a similar development level, have political or security partnerships, or have cultural ties. Why might that be? Consider that qustion as you read this section, and then answer the questions at the end of the section.
Multinational corporations have a workforce, presence, and operations in multiple countries. International expansion is one way corporations attempt to gain a competitive advantage over other companies in their industry. To learn more about how companies expand across borders, read this section.
The idea of national competitive advantage attempts to explain why certain industries in a country are more competitive internationally. Read this section, and focus on how Porter's national competitive advantage theory can be applied to countries like the United States, China, or Germany.
3.3: Economic Integration
Trade agreements allow companies to sell their products and services in other countries with little or no restrictions, depending on the agreement's terms. Think of some of your favorite products that come from another country. Most of them are possible due to trade agreements at some point in the process, and those agreements allowed the company to produce a quality product at a competitive price. Trade agreements have generated opportunities, but they have created challenges in some industries and countries. Jobs have become concentrated in lower-wage countries, which produce products that are then sent back to higher-wage countries through trade agreements. Read this section and then complete the questions at the end.
Regional economic integration removes trade barriers in a region, allowing for the free flow of goods, services, and people. The European Union is a perfect example of this type of structure. Other parts of the world also have started to integrate their own economic systems. As you read this section, think about what opportunities neighboring countries can offer one another when trade barriers are removed. What did European trade look like before the EU? How has economic integration benefitted European nations, and what new challenges has it created?
Read this document, published by the World Bank, to see how other regions like the Middle East and North Africa can benefit from economic integration.
3.4: International Trade Infrastructure
This study addresses the short-and long-term effects of infrastructure on exports and trade deficits in certain South Asian countries between 1990-2017. As you read, think about other countries where limited infrastructure capacity has affected their ability to develop.
International shipping is an essential part of trade. Countries must have port infrastructure and capacity to allow companies to ship their products to consumers worldwide. Countries with good port infrastructure will attract foreign investment and enable local companies to produce and ship to international markets more efficiently. Read this overview of a study of 91 countries with seaports that examined seaborne trade's economic effects, and how port infrastructure quality and logistics capacity affected trade efficiency.
Having a modern airport infrastructure is critical in today's fast-paced global economy. Some countries, such as the United Arab Emirates, have made significant upgrades and investments to their airport infrastructure in places like Dubai and Abu Dhabi, transforming the UAE from a little-known destination in the Middle East to a center of global commerce.
Have you ever wondered how the global airfreight industry operates and the level of coordination necessary throughout international airports to facilitate it? This video gives a unique view of transporting specialty luxury items via Emirates Airfreight.
Railways and roads are critical infrastructures in the international trade network since countries must have efficient means to transport goods from ports and airports to their destinations. The United States developed the interstate system in the 1950s, which created a vast network of highways that allowed for the much more efficient transporting of goods and people. Read this page, which discusses how railways developed in the United Kingdom in the 1830s and how that influenced the development of industry and transportation.
Unit 3 Discussion
- Start discussions: 1 Post replies: 1
What comparative advantages does the United States have in the global economy? Are they sustainable? Is it possible that the U.S. may lose some comparative advantages while gaining others?
- Start discussions: 1 Post replies: 1
What kinds of infrastructure are critical for countries seeking to be globally competitive? How does technological infrastructure, such as internet connectivity, compare with physical infrastructure? Will one category be more important in the future?
Study Guide: Unit 3
We recommend reviewing this Study Guide before taking the Unit 3 Assessment.
Unit 3 Assessment
- Receive a grade
Take this assessment to see how well you understood this unit.
- This assessment does not count towards your grade. It is just for practice!
- You will see the correct answers when you submit your answers. Use this to help you study for the final exam!
- You can take this assessment as many times as you want, whenever you want.