CH 5 International trade Commentary

       Why do nations trade? Clearly, there are economic gains from trading Internationally. Otherwise, there would be no willing exporters and importers. As quoted in peng's Global, International trading is a "win-win" deal. Countries have different natural, human, and capital resources, and different ways of combining these resources. Some countries are not equally efficient in producing the goods or services as their residents demand. Therefore countries look else ware for goods and services they may not have the time or resources to produce.
       In Chapter 5 we are introduced to new vocabulary concerning International trade. Export means to sell abroad, while import means to purchase from abroad. Merchandise trade is tangible products being bought or sol and service trade is intangible services being bought and sold. A trade deficit is an economic condition in which a nation imports more then it exports. In the United States the government does not like this type of activity. Clearly, due to the fact that it is in profitable. You are losing money if you are purchase more from abroad then producing more for abroad. You want to export more then you import instead of vice versa. A trade surplus is an economic condition in which a nation exports more then it imports, which is ideally for all countries around the world. Currently, China has a trade surplus.
       In 1776 Adam Smith introduced free trade which is still being used today. Free trade is he idea that free market forces should determine the buying and selling of goods and services with little or no government intervention. Specifically, he introduced the theory of absolute advantage. Absolute Advantage is the economic advantage one nation enjoys because it can produce a good or service more efficiently than anyone else. For example, in Peng's Global CH 5, it states that Portugal's enjoyed absolute advantage over England in producing grapes and wines because Portugal had better soil, water, and weather. Likewise, England had a better absolute advantage in raising sheep and producing wool when compared with Portugal. These supports both of Smith's insights. Primarily, by specializing in the production of goods for which each country has an absolute advantage, each country can successfully produce more. Secondly, both can benefit more by trading. The terms of trade must be such that both countries lower the opportunity costs of the goods they are getting from the trade. Therefore, both countries are successful and profit from the trade, this is where you can call it a "win-win" situation. Free trade is a method that is still being successfully used today.