1. All through history, people from one society have been trading with people from another. Three thousand years ago, for example, the Phoenicians of the Mediterranean built an economy almost completely on foreign trade. In the jargon of economics, the Phoenicians had an open economy, and almost every economy since theirs has been open too.
2. When an economy is open, this basically means that it imports and exports goods and services. What are the benefits of doing this? First of all, if you trade with other economies, you can import goods that do not exist in your economy. These may be products that your economy cannot manufacture, but they may also be raw materials. With a wider range of raw materials, an economy is able to use its capital and labour to produce a wider range of products. In this way, importing can actually help an economy grow. Whats more, if you allow imports from other countries, then you will have trading partnerships. This means that you can export to countries. If you have customers all over the world, your economy will grow faster.
3. However, another important reason for trading is to exploit advantages. Economists talk about two types of advantage that an economy can have over others: absolute advantage and comparative advantage. An economy has absolute advantage when it can produce goods at a lower cost than other economies can, or they have resources that others dont have. For example, warm Mediterranean countries have an absolute advantage in the production of olive oil. Many countries in Asia have an absolute advantage in manufacturing electronic goods. Clearly, it makes sense for countries with absolute advantages to trade with each others. The second kind of advantage is comparative advantage. This happens when an economy can produce something at a lower opportunity cost than other economies can. The opportunity cost of something is what you have to give up in order to have it.
4. Open economies are good for consumers, too. If the economy allows imports from abroad, there will be a greater variety of goods available locally. When products are available locally, imports of the same products should help to keep prices down and quality high. This is because local companies will have to compete with foreign companies, and more competition will mean better quality and greater value for money.
5. Economists describe imports and exports of material products as visible because you can really see and touch them. Examples of visible exports and imports are food stuffs, furniture and electronic equipment. However, there are also invisible imports and exports. These are mainly services, but can include all sorts of things. Examples of invisible exports and imports include banking services, insurance products, educational courses and tourism.
6. Opening up economies, however, brings problems. One of the main difficulties is keeping a good balance of trade. Every time a country manages to sell a product or service abroad, this means money will flow into the economy. On the other hand, every time someone buys from abroad, money flows out of the country. Over time, if the flow of money out of the economy is greater than the flow of money into the economy, then there is a trade deficit. This is not a good situation to be in. The challenge for governments is to keep the flow of trade equal in both directions, or to achieve a trade surplus. This is when total exports are greater than total imports.
7. Countries sometimes restrict trade with other countries. For example, governments may charge tariffs on imports. These are taxes which make imports more expensive than locally produced products. Governments decisions may also restrict the amount of imports entering the country. This kind of restriction is called an import quota. Among the reasons for restricting international trade are the following: stopping imports of dangerous goods, protecting local industries and jobs, preventing the local market from being flooded with cheap imports.
1.
