Macroeconomics - international trade - Term Paper Example

The paper will then talk about some protectionism and why should be some government interference in trade. I then talk about how the terms of trade (TOT) of a country are affected by the price of exports and imports and finally the paper ends with an explanation on the impact of exchange rates on a country’s trade in the international arena. International trade refers to the exchange of goods and services that occurs across international boundaries that is between two or more countries (Grant 452).

Countries that are involved in international trade are known as open economies while those that do not engage in it are called autarky or a closed economy. International trade differs from domestic or internal trade that takes place within the country. Restrictions are usually imposed by regulating authorities, international organizations and governments on the imports (foreign goods coming into a country) and exports (local goods supplied abroad). Communication can also be a problem in international trade however due to the advancements in technology and as a result of globalization this problem has been solved to a great extent.

There are also high transport costs involved as products often need to be transported from one part of the world to another. In order to buy a foreign good one must have the foreign country’s currency to buy that good. Although these assumptions are unrealistic however they need to be made in order to understand the two concepts more clearly. A country has an absolute advantage in production of a product when the country can produce more of the product than the other country by using the same amount of resources.

In other words producing the same amount if the product by using lesser resources. Let us illustrate this through an example. Suppose that there are only two countries, A and B, in the world producing only two goods, cloth and wheat. They produce per unit of