International Trade Essay Example for Free

International Trade Essay Relation between trade and world output International trade represents the exchange of goods/raw materials and also manufactured goods (and services) between countries. This situation occurs since a country has particular products or services that are much better than other countries in terms of quantity, price quality, or any other measurable factors. This idea further refers to a notion of competitive advantage. This condition encourages countries to trade their goods and services with other countries to take benefit from the countries that can produce goods more effective and efficient. In the past decades, the increase of international trade has driven the integration of the world economy. Moreover, within 1980 and 2002, the volume of world trade has raised relative to world output. This condition exists because the traded goods have become cheaper relative to those goods that are not traded. Furthermore, the condition occurs due to the influence of three factors characterize the increase in trade as following The decreasing costs of trade. In transportation, communication and search, currency exchange and tariffs are all factors that influence when trading goods internationally. Within the past 20 years, these costs are falling; suggesting that there would be an increase in the volume of trade. Second factor is the fact that tradable goods sector experience improved productivity growth. According to studies, it is found that productivity growth tends to be higher in the tradable goods sector than in the non-tradable goods sector. This situation will in turn increase the ratio of trade to output. The third factor is the increase of income per head. The increasing income will likely drive   consumers to shift their spending away from basic food and clothing products and into manufacturing goods, which offer more differentiation, diversification and international trade. Broad pattern of international trade Historically, trade has taken part since the existence of human being. While trade is not limited within countries, it develops into what we know as international trade or trade conducted among countries in the world. Paul Krugman and Maurice Obstfeld (1997) reveal that countries involved in an international trade based on two common reasons. First, they have goods that are different from others. Second, countries trade to achieve economies of scale in production. To understand the international trade, there is a theory called pattern of international trade as suggested by several scholars. In the Ricardian Model, for example, international trade exists when each country exports goods in which it has a comparative advantage and the existence of international trade is due to international differences in the productivity of labor. Second approach is from two Swedish economists, Eli Heckscher and Bertil Ohlin. Instead of solely determined by labor productivity as in Ricardian model, Heckscher-Ohlin theory emphasizes that comparative advantage is influenced by the interaction between nations’ resources (Krugman and Obstfeld, 1997). Relation between trade and world output The increasing oil price becomes critical and major problems of world economy. Its negative impacts seem to be the factors that haunt either industrialized countries or the developed ones. It is due to the negative impacts can lead severe international economic recession. People around the world would never forget such economic recession happened in 70’s. In the U.S. in order to reduce the dependence towards fossil fuel, they develop the alternative energy including the use of bio fuel. However, more than 90% of palm oil, raw material of bio fuel, is produced by Malaysia and Indonesia. If the two countries do not do trade with the U.S. for palm oil, the country may not offer bio fuel to their customers. Reference: Krugman, Paul R., and Maurice Obstfeld. (1997). International Economics: Theory and Policy. Addison-Wesley Dean, Mark and Maria Sebastia-Barriel. (2004). Why has world trade grown faster than world output? Retrieved January 21, 2008 from http://www.bankofengland.co.uk/qb/qb040304.pdf Wild, J. J., Wild, K. L., and Han, J. C. Y. (2006), International Business: The challenges of globalization (3rd ed.) (Chapters 4 – 6). Upper Saddle River, NJ: Pearson-Prentice Hall.