International trade is exchange of capital, goods, and services across international borders or territories. In most countries, it represents a significant share of gross domestic product (GDP). While international trade has been present throughout much of history (see Silk Road, Amber Road), its economic, social, and political importance has been on therise in recent centuries. Industrialization, advanced transportation, globalization, multinational corporations, and outsourcing are all having a major impact on the international trade system. Increasing international trade is crucial to the continuance of globalization. International trade is a major source of economic revenue for any nation that is considered a world power. Without internationaltrade, nations would be limited to the goods and services produced within their own borders.
International trade is in principle not different from domestic trade as the motivation and the behavior of parties involved in a trade does not change fundamentally depending on whether trade is across a border or not. The main difference is that international trade is typically more costly than domestictrade. The reason is that a border typically imposes additional costs such as tariffs, time costs due to border delays and costs associated with country differences such as language, the legal system or a different culture.
International trade uses a variety of currencies, the most important of which are held as foreign reserves by governments and central banks. Here the percentageof global cummulative reserves held for each currency between 1995 and 2005 are shown: the US dollar is the most sought-after currency, with the Euro in strong demand as well.
Another difference between domestic and international trade is that factors of production such as capital and labor are typically more mobile within a country than across countries. Thus international trade is mostlyrestricted to trade in goods and services, and only to a lesser extent to trade in capital, labor or other factors of production. Then trade in good and services can serve as a substitute for trade in factors of production. Instead of importing the factor of production a country can import goods that make intensive use of the factor of production and are thus embodying the respective factor. An exampleis the import of labor-intensive goods by the United States from China. Instead of importing Chinese labor the United States is importing goods from China that were produced with Chinese labor. International trade is also a branch of economics, which, together with international finance, forms the larger branch of international economics
Several different models have been proposed topredict patterns of trade and to analyze the effects of trade policies such as tariffs.
The Panama Canal is important for international sea trade between the Atlantic Ocean and the Pacific Ocean.
The Ricardian model focuses on comparative advantage and is perhaps the most important concept in international trade theory. In a Ricardian model, countries specialize inproducing what they produce best. Unlike other models, the Ricardian framework predicts that countries will fully specialize instead of producing a broad array of goods. Also, the Ricardian model does not directly consider factor endowments, such as the relative amounts of labor and capital within a country.
Assumptions of the Ricardian model (1) Labor is the only primary input to production(labor is considered to be the ultimate source of value). (2) Constant Marginal Product of Labor (MPL) (Labor productivity is constant, constant returns to scale, and simple technology. (3) Limited amount of labor in the economy (4) Labor is perfectly mobile among sectors but not internationally. (5) Perfect competition (price-takers).
The Ricardian model measures in the short-run, therefore...