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Benefits and Costs of International Trade

CFA® Exam, CFA® Exam Level 1, Foreign Exchange

This lesson is part 1 of 7 in the course International Trade and Capital Flows

International trade clearly has more benefits than the costs for the economies as a whole.

The key idea is that as different global economies specialize, nations can gain from trading with one another by creating abundances of those products and services that they do best.  The excess of one nation’s product can then be traded to another nation holding an abundance of its own specialty under mutually acceptable terms of trade.

Let’s take the example of China, which has been the exporter of a variety of goods ranging form textiles to electronics to the United States and other countries. There are benefits for both the exporting countries and the importing countries. The importing countries such as the US benefit from the lower cost of goods while the exporting countries benefit from more employment, increase in wages, and profits.

Along with the benefits, international trade also has its associated costs. With increase in imports, the domestic industries will have to compete with the imported goods. For example, as the textile imports in the US grew, many people lost their jobs. While textiles production went down, other industries such as healthcare picked up and people had to be retrained for these new jobs. Even some of the US textile firms used technology and capital to expand and grow.

This way each country starts specializing in some goods and services so that it become beneficial to produce of those goods and services and import the rest.

Overall, the benefits of international trade far outweigh the costs for overall economies in the long run.

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In this Course

  • Benefits and Costs of International Trade
  • Comparative Advantage Vs. Absolute Advantage
  • Ricardian and Heckscher-Ohlin Models of International Trade
  • Trade and Capital Restrictions
  • Trading Blocs, Common Markets, and Economic Unions
  • Balance of Payments Accounts
  • Role of International Organizations (IMF, World Bank, and WTO)

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