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By the end of this section, you will be able to:
  • Explain the meaning of trade balance and its implications for the foreign exchange market
  • Analyze concerns over international trade in goods and services and international flows of capital
  • Identify and evaluate market-oriented economic reforms

In the 1950s and 1960s, and even into the 1970s, openness to global flows of goods, services, and financial capital was often viewed in a negative light by low- and middle-income countries. These countries feared that foreign trade would mean both economic losses as their economy was “exploited” by high-income trading partners and a loss of domestic political control to powerful business interests and multinational corporations.

These negative feelings about international trade have evolved. After all, the great economic success stories of recent years like Japan, the East Asian Tiger economies, China, and India, all took advantage of opportunities to sell in global markets. The economies of Europe thrive with high levels of trade. In the North American Free Trade Agreement (NAFTA) , the United States, Canada, and Mexico pledged themselves to reduce trade barriers. Many countries have clearly learned that reducing barriers to trade is at least potentially beneficial to the economy. Indeed, many smaller economies of the world have learned an even tougher lesson: if they do not participate actively in world trade, they are unlikely to join the success stories among the converging economies. There are no examples in world history of small economies that remained apart from the global economy but still attained a high standard of living.

Although almost every country now claims that its goal is to participate in global trade, the possible negative consequences have remained highly controversial. It is useful to divide up these possible negative consequences into issues involving trade of goods and services and issues involving flows of international capital. These issues are related, but not the same. An economy may have a high level of trade in goods and services relative to GDP, but if exports and imports are balanced, the net flow of foreign investment in and out of the economy will be zero. Conversely, an economy may have only a moderate level of trade relative to GDP, but find that it has a substantial current account trade imbalance. Thus, it is useful to consider the concerns over international trade of goods and services and international flows of financial capital separately.

Concerns over international trade in goods and services

There is a long list of worries about foreign trade in goods and services: fear of job loss, environmental dangers, unfair labor practices, and many other concerns. These arguments are discussed at some length in The International Trade and Capital Flows .

Of all of the arguments for limitations on trade, perhaps the most controversial one among economists is the infant industry argument ; that is, subsidizing or protecting new industries for a time until they become established. ( Globalization and Protectionism explains this concept in more detail.) Such policies have been used with some success at certain points in time, but in the world as a whole, support for key industries is far more often directed at long-established industries with substantial political power that are suffering losses and laying off workers, rather than potentially vibrant new industries that have yet to be established. If government is going to favor certain industries, it needs to do so in a way that is temporary and that orients them toward a future of market competition, rather than a future of unending government subsidies and trade protection.

Questions & Answers

Ben Reply
what is the determination of aggregate demand?
Maddy Reply
classical dichotomy and its components?
Romaisa Reply
what will happen to the demand curve when there is an inflation in an economy
Hamza Reply
From my view, I think the demand curve will shift inwards.
now it depends on what kind of inflation it is, depending on the type of inflation the movement of the demand curve can be stated.
yes it depends on the cause for inflation. if it caused by maybe an increase in money supply, the effect is neutral in the long term, therefore there are no effects on total output in the economy, except for an increase in price
but short term in general i think you could expect the demand curve to shift inwards as consumers experience a decrease in real income
source of capital for the sole trader
Dogbey Reply
borrowing from relatives, government grants, bank loans, personal savings, credit card etc.
Suppose you are holding 2000 in a checking account and the price level decrease by 20 %how much it will affect your purchasing power and why
Iqra Reply
Hi Iqra, will answer your question soon.
2000*0.2= 400 2000-400= 1600
a price level decrease is deflation. it means you'll be able to afford to buy more with your 2000 and your real income becomes 2000÷(100-20)=2500
the amount will decrease to 1600 and you can't be able to buy over this amount
As an economist student discuss how the pandemic covid19 can affect the aggregate demand and aggregate supply thereby leading to decrease in GDP and standard of living of citizens of nigeria
Fadila Reply
hi how can you help me?
qusai Reply
can you send me the notes
hello is what are you talking about?
unemployment and low inflation    .
Abdirizaq Reply
Structure/Organization Of The Federal Reserve
sorry guys in macroeconomics what is different between inflation and intrest rate? please example for pandemic related maybe?
Is this Aap for class 11 and 12 only not for graduation?
ankit Reply
yeah like for du MA entrance
Aree i m also asking
for du MA entrance. u shouldn't rely on app. Go for SAURABH SIR notes. available on flipkart.
ohh thanks
what is inflation
Bright Reply
hike in price
situation of rise in price with the fall in purchasing power of money
cycle of corruption
rise in price of a Nation economy in terms of trade
what is distruptive international trade?
meaning of inflation
Jayakumar Reply
increase in general prices level in an economy.
increase in general price level
The fall in standard of living because goods and services become expensive.
what is value added and how is it used in calculating GDP
Benedicta Reply
value added is final price of output minus cost of production. For example, let's say you make a shirt with raw materials that cost $20, and then sell the shirt for $35 added value would be 35-20=15. In calculating GDP, it is used to avoid double counting goods. Exp. eggs individually and in bread.
as the price of tickets rises from $200 to $250, what is the price elasticity of demand for business travelers, vacationers using midpoint method
Buumba Reply
@jb how do uget $300
It means you are measuring the cost against availability.
Explain how income taxes and transfer payments are used to stabilize the economy
Nakagwa Reply
reduce demand on scarce resources by reducing money supply.

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Source:  OpenStax, Macroeconomics. OpenStax CNX. Jun 16, 2014 Download for free at http://legacy.cnx.org/content/col11626/1.10
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