Key Factors in International Trade
International trade occurs when one country trades with another. Trade between nations is an essential part of the global economy. Certain raw materials can only be produced in certain parts of the world; many countries must trade for materials they are unable to produce themselves, and many choose to trade for goods that can be produced more efficiently elsewhere. There are many key issues that impact international trade.
Exchange rates are the rates at which world currencies can be exchanged for one another. Exchange rates determine how costly it is to buy a different world currency with your home currency, and therefore how expensive it is to purchase goods from that foreign country. For instance, if a dollar could buy 100 yen, you would be able to import more goods with $1000 than if a dollar could only buy 50 yen. Exchange rates are in a constant state of fluctuation, which can affect the way nations trade. When the value of a currency goes down with respect to other currencies, the country with the currency that is losing value typically imports fewer goods and exports more goods.
Individual countries, or groups of countries, can set their own conditions that affect international trade. Trade agreements encourage trading between two or more countries by setting preferential conditions that give advantages to participating members. Barriers make it harder to trade internationally. For example, tariffs may add government levies or fees to imports. Taxing imports makes it more difficult for imported goods to compete with domestic ones.
Production standards are another key factor that affects international trade. Rich countries like the United States often import goods from countries that can produce goods inexpensively due to low labor costs, but the standards used to create goods can vary from one country to another. For instance, the United States might impose strict quality-control or environmental standards on the manufacture of a certain type of product while another country might not have high standards. This can result in a competitive advantage for countries that do not have to follow strict standards.
A subsidy is government assistance given to a certain company or industry to reduce the price of domestic goods. Subsidies have an effect similar to tariffs: they tend to make people buy domestic goods in greater numbers because they make domestic goods less expensive relative to imported goods. Subsidies are a way governments protect domestic industries that may not be able to compete internationally.