Global Economy · StudentHub Lesson
International Trade
Why countries trade, how exchange rates work, and the effects of tariffs and trade deficits.
What you will learn
- Explain why countries trade based on comparative advantage
- Define imports, exports, and net exports
- Understand how exchange rates affect trade
- Explain the effects of tariffs and quotas on trade
- Interpret a trade deficit versus a trade surplus
Watch the lesson
Imports, Exports, and Exchange Rates: Crash Course Economics #15 · CrashCourse
Watch on YouTubeTopic notes
Main Idea
International trade lets countries specialize based on comparative advantage, exchanging goods and services to make everyone better off overall.
Key Concepts
- Exports: goods/services sold to other countries; Imports: goods/services bought from other countries
- Net exports = exports - imports
- Trade deficit: imports exceed exports; trade surplus: exports exceed imports
- Exchange rate: the price of one currency in terms of another, which affects how expensive imports/exports are
- Tariffs: taxes on imported goods that raise prices and protect domestic industries
- Quotas: limits on the quantity of a good that can be imported
Diagram (described)
Picture two countries' PPCs — without trade each is limited to its own curve; after specializing by comparative advantage and trading, both can consume combinations outside their own individual PPCs.
Example
If the US exports $500B and imports $700B, net exports = 500 - 700 = -$200B, a trade deficit.
Common Mistakes
- Assuming a trade deficit is automatically bad for an economy — it isn't necessarily
- Confusing tariffs (taxes) with quotas (quantity limits)
- Thinking a stronger currency always helps exporters — it actually makes exports more expensive abroad
Key concepts
Important terms
- Net exports
- The value of a country's exports minus its imports.
- Trade deficit
- A situation where a country's imports exceed its exports.
- Exchange rate
- The value of one currency expressed in terms of another currency.
- Tariff
- A tax imposed on imported goods, typically to protect domestic industries.
Worked examples
Problem
A country exports $300 billion worth of goods and imports $260 billion. What is net exports, and is this a surplus or deficit?
- 1. Net exports = exports - imports
- 2. = 300 - 260 = 40
Answer: Net exports = $40 billion; this is a trade surplus
Quick revision
- Trade is driven by comparative advantage
- Net exports = exports minus imports
- Trade deficit: imports > exports; surplus: exports > imports
- Exchange rates determine relative prices of currencies
- Tariffs are taxes on imports; quotas are quantity limits
- A stronger domestic currency makes exports more expensive abroad
Check your understanding
Question 1 · Multiple choice
Net exports is calculated as:
Question 2 · Multiple choice
A tariff is best described as:
Question 3 · True or false
A trade deficit means a country's exports exceed its imports.
Question 4 · Short answer
Why might two countries both benefit from trade even if one is more efficient at producing everything?
Question 5 · Multiple choice
If a country's currency strengthens (appreciates), its exports typically become:
Done with International Trade?
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