Domestic vs. international trade

International trade occurs when products produced in one country are consumed in another country. The existence of a border between the producing and the consuming country creates a number of issues.

There could be restrictions on imports and exports in the form of tariffs, quotas, and product requirements. This could change what is traded and how much.

Most countries use different currencies and therefore international transactions have additional currency conversion costs. Also, traders have to consider whether currency values would change over time. They may have to sign contracts now for delivery of the products and payments in the future when currency values have changed. Hedging, i.e. protecting oneself, against such currency changes is costly.

There could be different languages, customs, laws and procedures that make the entry into a foreign market more difficult.

There could also be additional transport costs if countries are not close to each other or their transport networks are not well connected.

Yet, as the chart shows, international trade is alive and well. It must be the case that the benefits from it exceed the various impediments described above.



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