how trade works
as a generic term trade can refer to any voluntary exchange from selling baseball cards between collectors to multimillion dollar contracts between companies in macroeconomics trade usually refers to international trade the system of exports and imports that connects the global economy a product sold to the global market is an export and a product bought from the global market is an import exports can account for a significant source of wealth for well connected economies international trade results in increased efficiency and allows countries to benefit from foreign direct investment fdi by businesses in other countries fdi can bring foreign currency and expertise into a country raising local employment and skill levels for investors fdi offers company expansion and growth eventually leading to higher revenues a trade deficit is a situation where a country spends more on aggregate imports from abroad than it earns from its aggregate exports a trade deficit represents an outflow of domestic currency to foreign markets this may also be referred to as a negative balance of trade bot the total value of the global trading market according to the united nations conference on trade and development 1international tradeinternational trade occurs when countries put goods and services on the international market and trade with each other without trade between different countries many modern amenities people expect to have would not be available trade seems to be as old as civilization itself ancient civilizations traded with each other for goods they could not produce for themselves due to climate natural resources or other inhibiting factors the ability of two countries to produce items the other could not and mutually exchange them led to the principle of comparative advantage this principle commonly known as the law of comparative advantage is popularly attributed to english political economist david ricardo and his book on the principles of political economy and taxation in 1817 however ricardo s mentor james mill likely originated the analysis ricardo famously showed how england and portugal benefited by specializing and trading according to their comparative advantages in this case portugal was able to make wine at a low cost while england was able to manufacture cloth cheaply by focusing on their comparative advantages both countries could consume more goods through trade than they could in isolation the first long distance trade is thought to have occurred 5 000 years ago between mesopotamia and the indus valley the theory of comparative advantage helps to explain why protectionism is often counterproductive while a country can use tariffs and other trade barriers to benefit specific industries or interest groups these policies also prevent their consumers from enjoying the benefits of cheaper goods from abroad eventually that country would be economically disadvantaged relative to countries that conduct trade comparative advantage is one country s ability to produce something better and more efficiently than others whatever the item is it becomes a powerful bargaining tool because it can be used as a trade incentive for trading partners 