Why analyze the benefits and costs of international trade?

Introduction

This module on International Trade and Finance may be more important than you think. Why do people work for pay instead of growing their own food, building their own house and making their own clothes? Most people are capable of painting their own homes, yet professional painters continue to make a good living. How is international trade different from domestic trade? The answer is not very much, except for some important details. People buy imported goods for the same reasons they buy domestic goods. And yet we often treat foreign and domestic trade as fundamentally different. A grocery chain from a nearby U.S. state has recently opened some stores in your neighborhood. How would you feel if the local government prohibited you from trying to shop at those new stores?

In this module, you will learn that just as buying from the local grocery store is better for most people than growing your own food, so international trade can add to your convenience and quality of life. And yet, most countries support some degree of protectionism, barriers to trade like tariffs or quotas designed to “protect” domestic workers and companies.

As you proceed through this chapter, consider the following questions:

• What is comparative advantage?
• What are the gains from international trade?
• In what sense do barriers to trade protect American workers and companies?
• What are the costs of that protection?  Are the costs worth it?
• What causes the foreign exchange value of a currency to increase or decrease?
• How does the balance of trade affect the macro economy?