290 Why It Matters: Globalization, Trade and Finance

Why analyze the benefits and costs of international trade?

This module may be more important than you think. The topic is international trade and includes aspects of globalization and finance, but the theory explains every transaction we conduct. Why do people work for pay instead of growing their own food, building their own house and making their own clothes? Most people are capable of painting their own homes, yet professional painters continue to make a good living. How is international trade different from domestic trade? The answer is, “not very much, only in the details.” People buy imported goods for the same reasons they buy domestic goods. And yet we often treat foreign and domestic trade as fundamentally different. A grocery chain from a nearby state has recently opened some stores in your neighborhood. How would you feel if the local government prohibited you from shopping at those new stores?

In this module, you will learn that just as buying from the local grocery store is better for most people than growing your own food, so international trade can add to your convenience and quality of life. And yet, most countries support some degree of protectionism, barriers to trade like tariffs, or quotas designed to “protect” domestic workers and companies.

As you proceed through this module, consider the following questions:

•      What is comparative advantage?
•      What are the gains from international trade?
•      In what sense do barriers to trade protect American workers and companies?
•      What are the costs of globalization? Are the costs worth it?
•      What causes the foreign exchange value of a currency to increase or decrease?
•      How does the balance of trade affect the macro economy?

LEARNING OUTCOMES

• Define and calculate comparative and absolute advantage
• Explain how a nation’s workers and consumers are affected by impact of international trade
• Understand the way government regulations (e.g. tariffs, quotas and non-tariff barriers) affect business, consumers and workers in the economy
• Differentiate between alternative international trade regimes and how they impact global trade
• Define currency exchange rates and explain how they influence trade balances
• Explain how the balance of trade (surplus or deficit) affects the domestic economy, and how the domestic economy affects the balance of trade
• Connect globalization, international trade, and international finance