Reasons for TradeEdit

Main article: Reasons for Trade
Countries trade because they are better off because of trade. The gains a country can gain from trade are:
  • Increase in economic welfare
  • Exports increase national income
  • Imports goods that cannot be produced in that economy
  • Stimulates innovation
  • Increases the consumer choice
  • Leads to better efficency

Free Trade and ProtectionismEdit

Main article: Free Trade and Protectionism
It is the international exchange of goods and services without any artificial barriers to trade.
Arguements for protectionism:
  • Infant industry arguement
  • Anti- dumping
  • Protecting employment
  • Balance of payments
  • Externalities and demerit goods
  • Strategic reasons
  • Unrealistic assumptions of comparitive advantage

Arguements against protectionism:

  • Loss of comparitive advantage
  • Costs to consumers
  • Loss of competitiveness and efficiency
  • Governments choose the wrong areas

Economic IntegrationEdit

Main article: Economic Integration

World Trade OrganizationEdit

Main article: World Trade Organization

Balance of PaymentsEdit

Main article: Balance of Payments

Exchange RatesEdit

Main article: Exchange Rates

Purchasing Power ParityEdit

Purchasing power parity (PPP) is a theory of long-term equilibrium exchange rates based on relative price levels of two countries. The concept is founded on the law of one price and the idea that in absence of transaction costs, identical goods will have the same price in different markets. PPP exchange rate (the "real exchange rate") fluctuations are mostly due to different rates of inflation between the two economies. The PPP exchange-rate calculation is controversial because of the difficulties of finding comparable baskets of goods to compare purchasing power across countries. Estimation of purchasing power parity is complicated by the fact that countries do not simply differ in a uniform price level. The difference in food prices may be less than the difference in housing prices, while also greater than the difference in entertainment prices.

Terms of TradeEdit

Main article: Terms of Trade

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