International economics and trade is a rapidly growing field of study. This is because people all over the world are becoming increasingly aware of the fact that their own local economies are no longer simply a reflection of what happens within their own towns, states or countries. Now, their local economies are also influenced by events and activities that take place in places as far afield as Africa, Asia or Europe.
The growth of international trade has been extraordinary: exports today are more than 40 times larger than they were a century ago. This chart shows the magnitude of the increase by displaying total merchandise exports on a logarithmic scale. You can also click on the option marked ‘Linear’ at the top of the vertical axis to switch to a linear scale.
One of the reasons for this incredible expansion in trade has been the emergence of a large group of rich, democratic countries that dominate global trade. Until recently, most of the world’s commerce took the form of exchanges between these ‘rich countries’. Today, however, trade between rich and non-rich countries has also exploded.
Among economists, there is a broad consensus that free trade generally benefits the world economy. There is strong evidence that increased openness to trade raises per capita income, and that government-imposed restrictions upon trade tend to reduce rather than raise economic growth rates.
This consensus is partly based on a model of trade that focuses on comparative advantage, the idea that different nations are endowed with different natural resources or human capital. This allows some countries to produce goods more efficiently, so that they can sell them cheaper than other countries can. Other scholars have argued that trade is a good thing even when countries have similar endowments and that, in addition to comparative advantage, there are other reasons to trade — such as the benefits of specialization, economies of scale and technology spillovers.
Another reason why there is a broad consensus that trade benefits the world economy is the fact that it creates jobs. When a country opens up its markets to foreign products, domestic businesses must compete with those from abroad, and so they must hire additional workers. This in turn raises wages in the economy as a whole. In addition, the import and export of goods shifts prices in all sectors of the economy.
In addition to the direct job creation and wage effects of trade, there are indirect benefits that accrue to all the world’s citizens. These include greater consumer choice, the deepening of specialisation and economies of scale, and the transmission of technological advances. This is known as the ‘general equilibrium effect’. Nevertheless, there is no guarantee that the gains from trade will be evenly distributed. The distribution of the gains from trade will depend on what each individual consumes and how much they consume. In some cases, the gainers will not compensate the losers. This is why economists are keen to study how to improve the functioning of the trading system and ensure that it delivers its benefits to all of the world’s people.