Why countries trade
- International trade is the exchange of goods and services between countries. Exports are sold abroad; imports are bought from abroad.
- Countries trade to get goods they can't produce, to specialise in what they are best at, and to benefit from more choice, lower prices and economies of scale.
Free trade and protectionism
- Free trade is trade without barriers. Free trade agreements (such as the UK's deals with other countries) reduce tariffs.
- Protectionism is restricting trade to protect domestic industries. Methods: tariffs (taxes on imports), quotas (limits on the quantity of imports) and subsidies to domestic firms.
- Arguments for protection: protecting new (infant) industries and jobs, and national security. Arguments against: higher prices, less choice, and retaliation from other countries.
The balance of payments
- The current account records trade in goods and services, plus income flows. A current account deficit means more money is spent on imports than earned from exports.
- The UK usually has a deficit in goods but a surplus in services, such as financial services.
Key terms
- Exports
- Goods and services sold to other countries.
- Imports
- Goods and services bought from other countries.
- Free trade
- Trade without barriers such as tariffs.
- Protectionism
- Restricting trade to protect domestic industries.
- Tariff
- A tax on imports.
- Quota
- A limit on the quantity of imports.
- Balance of payments
- A record of a country's transactions with the rest of the world.
- Current account deficit
- When a country spends more on imports than it earns from exports.