INTERNATIONAL TRADE AND THE WORLD ECONOMY

 
Figure 6.1
Trade : 
voluntry exchange of goods, services assets, or money between one person or organization and another. Because it is voluntary, both parties to the transaction must believe they will gain from the exchange or else they would not complete i. 

Iternational Trade :
Trade between residents of two countries. The residents may be individuals,firms, not-for-profit organizations, or other forms of associations.

Why does international trade occur? The answer follow directly from our definition of trade: Both parties to the transaction, who happen to reside in two different countries, believe they benefit from the voluntary exchange. Behind this simple truth lies much economic theory. Business practice, government policy, and international conflict-topics we cover in this and the next four chapters

    As figure 6.1 indicates, world trade has grown dramatically in the half century since the end of World War II. Total international merchandise trade in 2006 was $12.1 trillion, or approximately 25 percent of the world's $48.2 trillion gross domestic product (GDP); trade in services that year amounted to $2.7 trillion. The Quad countries accounted for 55 percent of the world's merchandise export ( see Figure 6.2); China , 8 percent; and other countries ,37 percent. Such international trade has important direct and indirect effect on national economies. On the one hand , exports spark additional economic activity in the domestic economy. Caterpillar 's $10.5 billion in exports generates orders for its U.S.suppliers, wages for its U.S. workers, and dividend payment for its U.S. shareholders , all of which then create income for local automobile dealers , grocery stores,and others, which in turn add to their own payrolls. On the other hand,imports can pressure domestic suppliers to cut their prices and improve their competitiveness. Failure to respond to foreign competition may lead to closed factories and unemployed workers.

Figure 6.2
Source of the World's
Merchandise Exports,
2006


     Because of the obvious significance of international trade to businesses, consumers,and workers, scholars have attempted to develop theories to explain and predict the forces that motivate such trade. Government use these theories when they design policies they hope will benefit their countries' industries and citizens. Managers use them to identify promising markets and profitable internationalization strategie