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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

Do we have calculation in macroeconomics
Wilberforce Reply
What will be the multiplier, when MPS is 0, 0.4, 0.6, and 1? What will it be when the MPC is 1, 0.90, 0.67, 0.50, and 0? How much of a change in GDP will result if firms increase their level of investment by $8 billion and the MPC is 0.80? And If the MPC is 0.67?
Ayesha Reply
what are the side effects of government policies
narayan Reply
Government policy can influence interest rates, a rise in which increases the cost of borrowing in the business community. Higher rates also lead to decreased consumer spending. Lower interest rates attract investment as businesses increase production.
if there is a negative technology shock to the economy in short run the firms production cost will go up and labor goes down and thus consumption and production will be lower than before. the government can spend to create jobs and central Bank can lower the interest rates
what are marlet prices
Jaheim Reply
price which includes net indirect taxes
what is aggregate demand
Kalkidan Reply
what is micro economics
A-dip Reply
microscopic study...
microeconomics is study of individual, household and firms of division making and allocation of resources.
Join me in Vietnam
what a pure economics. must have downloaded by mistake.
microeconomics is the study of an individual unit in an economic system or an household
what really cause inflation?
Urey Reply
what is trade deficit
vivek Reply
is ther forgon alternative. is the amount sacrifice of one thing to gain another thing
what is enflation rate?
Mohibullah Reply
Is it inflation rate sir
This is the annual rate of increase of basic household goods and services and measures also the cost of living and doing business in a country. it's a important information when making for forecast or business plans.
this is continuous increase of overall price level
the betewen microeconomics and macroeconomics is microeconomics is concerned with individual scarcity like household,workers and so on while macroeconomics is focuced on the problème winth organisation the collaboration with others companies the profits and then the growth of the organisation
Amadou Reply
what is unemployment?
what is tax base
ekwuye Reply
The tax base is the total amount of income, property, assets, consumption, transactions, or other economic activity subject to taxation by a tax authority.
difference between voluntary and involuntary unemployment?
what is economic system
Alinda Reply
Quantity of Gasoline in millions was?
Touseef Reply
1000cubic meter
definition of phillips curve
Alok Reply
what is closed economy
Nati Reply
an economy that is not open
meaning: The economy is a closed system, there is not trade between this economy and another one, so no shared market. just a system with no outside influences.
what are the decision-making unit of an economy..?
an economy which is not involved in exchange with foreign countries

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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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