Gary Rabbior Canadian Foundation for Economic Education Toronto, Canada Gary Rabbior has served as President of the Canadian Foundation for Economic Education (CFEE) since 1981. Based in Toronto, CFEE works to enhance economic capability and enable people to undertake economic decisions and actions with confidence and competence.

In his book Shoeless Joe, W. P. Kinsella drew a strong parallel between baseball and America. But look at baseball in America today. American baseball teams now include many players from Costa Rica, Cuba, Japan, Canada, and other countries around the world. Baseball now reflects the way in which every aspect of life is becoming more global — more internationally linked.

Increasingly, business takes place in a global marketplace, a marketplace full of challenges and opportunities. Those who understand the global marketplace, the economics of our international world, and the fundamentals of international trade and finance will be better equipped to meet the challenges and take advantage of the opportunities that the global marketplace presents. Education holds the key to this understanding.

International trade is important to the economic growth and development of nations. Both developed and developing countries prosper from increasing interdependence and trade. Unfortunately, in the general public (and among our politicians), many Americans fail to understand international trade and the benefits it provides. A more knowledgeable citizenry will help ensure that international economic policies will promote economic growth and improve the living standards in the United States and around the world.

Put simply, the standard of living that a country enjoys depends almost entirely on its ability to best satisfy people's wants and needs with the scarce resources available. That is, how well a society can translate its scarce resources into goods and services that are most desired will determine whether a poor country can break its cycle of poverty and whether a rich country can take its economy to new heights. Many factors determine a country's ability to produce goods and services: the amount and quality of the factors of production (labor, physical capital, human capital, and natural resources), technology, political stability, and a policy climate that fosters reliance on markets to allocate scarce resources and promotes free trade. Ever since David Ricardo's work in 1817, economists have known that trade can play an important role in improving the economic welfare of a nation. (Ricardo, who wrote Principles of Political Economy and Taxation, was a strong advocate of the efficiencies of the free market.)

In today's increasingly global environment, it is essential that we open students' eyes and ears to global realities and opportunities. We need to ensure that they are thinking in an outward, forward, and global manner. We need to help them see how the global economy expands their horizons, their options, and their potential for success. And we need to help them develop a level of global awareness and sensitivity that will enable them to make informed judgments regarding the international economic policies of current and potential elected officials.

Let's explore the link between a nation's economic performance and international trade, taking note along the way of the economic principles that are crucial for understanding this relationship. We begin with a look at the fundamental economic issues faced by all countries.

Economic Well-Being
One of the great mysteries in economics is why some countries have grown rapidly whereas others have remained stagnant. For example, despite similar starting points, Brazil experienced approximately an eight-fold increase in its living standards between 1900 to 1990, whereas living standards in Pakistan have merely doubled during the same period. Why? Of course, many factors can help explain these different growth patterns. Given the complex dynamics involved, students need a general framework they can use to prioritize the relevant factors and uncover their interrelationships. The goal is to understand how to obtain the most goods and services from a society's scarce resources, which brings us to the basic economic questions all nations must answer.

The Basic Economic Questions
We noted earlier, that learning about international trade requires attention to resources and decisions about how to use resources in order to produce goods and services that satisfy needs and wants. But this point brings us to the basic economic questions faced by any society — what to produce, how to produce, and how to distribute what is produced. The answers to these questions can be significantly affected by international relationships and trade opportunities. In essence, trade increases options and choice. Choice is the next economic concept central to this discussion.

Choice and Opportunity Cost
Making choices, deciding among alternatives, and considering opportunity cost (the loss of the next best alternative) are concepts fundamental to economics. Every nation must decide how to manage its scarce resources — what goods and services to make, how to make them, and how to distribute them among members of society. As we will see, consumption possibilities increase as a country participates in international trade. However, trading opens up additional questions. What products should people specialize in producing? Which ones should they obtain through trade? How much should people receive in exchange for the goods they trade? That is, the range of choices is expanded, alternatives increase and opportunity costs change when people become involved in international trade. To understand all this, we begin by studying a nation's productive ability. Then we can turn our attention toward questions of trade.

Economic Resources
This is an obvious but misleading place to start. Many people think that countries are either "born" with a plentiful supply of scarce resources (in which case, they are likely to prosper) or are unfortunately given very few resources (in which case, they will likely remain poor). However, this view is deeply misleading. Some countries such as Russia and China enjoy abundant natural resources, but thus far they have remained developing countries. Conversely, Japan has very little in the way of natural resources, but it has experienced the highest growth rate of any country in the 20th century. Natural resources are important in the economic activity that determines a country's standard of living, but many other factors play a bigger role.

Productivity Growth
A nation's productivity growth — output per worker hour — is the single most important engine of growth. Although natural resources are also important, these resources are typically fixed; therefore they play a limited role in explaining changes in productivity (and hence changes in standards of living). Other factors matter much more, especially a nation's technology, its physical capital accumulation, and its human capital. Intuitively, if society can provide its workers with innovative production methods or better tools, each worker will be able to produce more goods and services from the same amount of resources. For example, the United States is in the midst of its largest postwar economic expansion, and many economists attribute this period of success to recent advances in technology, in general, and to information technologies and computers, in particular.

In summary, a nation's capacity for growth depends crucially on its ability to generate more goods and services from the scarce resources it possesses. That ability, in turn, is influenced by technological innovation, improvements in human and physical capital, and access to natural resources. International trade does not change the significance of productivity growth for a country, but it does provide a country with new opportunities for improving standards of living.

Open versus Closed Economies
If a large wall were to be built around each nation today, so that no goods or services could enter or leave, the economic consequences would differ greatly from nation to nation. Imagine the consequences if no goods and services flowed from one nation to another. Would wealthy nations get wealthier? Would poor nations get poorer? Would things stay the same? Imagine products you use today that would no longer be available. Imagine jobs and incomes that would be lost by those who work to produce the goods and services that are sold to other countries. How would our world be different?

The likely scenario is that people in virtually every nation would do more poorly. This is because international trade — the exchange of goods and services between and among nations — helps people in every nation to improve their level of economic well-being. Our world today is affected positively by the economic links among nations, and fortunately those links are increasing. More countries are opening up their economies to the international exchange of goods and services, primarily in order to improve the economic well-being of their citizens. But why does free trade improve the economic well-being of people in each country?

Trade or Exchange
In a trade or exchange, two parties agree to a transaction because both believe they will end up better off after the trade than before. Most people are involved in trades (or exchanges) on almost a daily basis, trading labor for income, exchanging money for items purchased, and so on. The key here is that such trades or exchanges are, by definition, win-win situations (provided that no coercion is involved). If that weren't the case, then people (or nations) wouldn't agree to trade. Even so, individuals looking out at a world of trade opportunities face a key question. What should they produce for trade?

Absolute Advantage
Each nation needs to decide what goods and services it can produce better than another nation, for a relatively lower cost. For example, which country — the United States or Canada — is better at producing wheat? The answer depends on the resources that are required in each country to produce an equal output of wheat. The nation that can use fewer resources to produce the same amount of wheat has an absolute advantage in wheat production. So that nation should produce a surplus of wheat and sell (trade) it to other nations, right? Not necessarily. That brings us to our next concept.

Comparative Advantage
Comparative advantage is slightly more complicated than absolute advantage, but it is critical for understanding the gains derived from international trade. Comparative advantage comes down to the opportunity cost of producing a particular good or service. As a hypothetical example, suppose that the United States is better than Canada at producing both cars and wheat. That is, the United States has an absolute advantage in the production of both. But the United States may have to give up more (face a higher opportunity cost) to produce one of the goods than the other. In that case, the best choice is to concentrate on producing a surplus of the good with the comparative advantage (the good with a lower opportunity cost) and then sell that product in international markets. A different sort of example may help to clarify this point. Even if a company CEO were a better typist and better at managing the company, the CEO would still be wise to hire a secretary to do the typing. Why? Because the opportunity cost of his or her time spent typing is higher than the secretary's. That is, the margin of the CEO's superiority in managing is greater than his or her margin of superiority in typing.

Comparative advantage is extremely important for students to understand, because it has significant policy implications for a nation. In general, it shows that a country can benefit from trade across a wide range of circumstances, suggesting that protectionist policies limiting free trade are much less likely to promote economic growth. Comparative advantage shows us that increased globalization is much like technological improvements; it allows a country to consume more goods and services using the same amount of scarce resources.

Markets
Once goods and services are produced, they compete with other goods and services in the markets (where buyers and sellers come together to exchange goods and services). As countries become more interdependent, markets for goods and services become more competitive. Domestic producers must compete not only with other domestic producers, but also with companies located abroad. This increased competitiveness will lead to more efficient production and allocation of the goods and services in question. So, in addition to expanding a nation's consumption possibilities, thanks to comparative advantage, increased globalization also causes markets to become more competitive, hence more efficient.

Investment
Investment entails spending to make improvements in a production process, so that more output can be produced using the same amount of input.

International trade facilitates this process by allowing firms to take better advantage of economies of scale — the idea that, for some products, as the size of the firm increases, the per unit costs of production decline. When this occurs, the firm in question uses fewer of society's scarce resources to produce a given amount of the good or service. Resources then are freed up for society to use elsewhere.

Other Concepts
Many other concepts come into play in the study of international economics. A discussion of international finance — the flow of financial assets across countries — would be the logical next step. This would allow an analysis of the role that exchange rates play, as well as the consideration of the impact of net foreign investment flows on a country's economic performance. The cause of trade deficits and their significance is widely misunderstood, most often because people fail to realize that a country's trade deficit means, among other things, the country is investing less abroad than foreigners are investing domestically. A clarification of this basic accounting identity would eliminate many of the misconceptions people hold regarding trade imbalances.

In addition, we have only touched on the debate between protectionism and free trade policies. Since the gains from free trade are typically not distributed evenly among people in a country (indeed, some people are worse off), there are always special interest groups who would like to restrict the flow of goods and services across countries. A more careful discussion of who is helped and who is hurt from increased globalization will allow for a more complete analysis of the free trade-protectionism debate.

Conclusion
Teaching international trade, in itself, provides a win-win situation. First, young people expand their horizons to a world of improved opportunity — a world rich in potential for personal and business success. Second, they develop a better understanding of the forces and pressures now shaping the world in which they will have to build their futures. And third, people in other nations may improve their standards of living as a result of the consideration granted to them by a well-informed generation that sustains a global perspective in the decisions it makes and the actions it undertakes.

The world is full of opportunity, and we owe it to our young people to help ensure that they can identify, and act on, the opportunities that exist now and those that will evolve over the course of their lifetime. The onset of the new millennium is a time for reflection and vision. As we look back and see how far we have come, let's also look ahead to see the world as it will and can be. And let's imagine how our children can enjoy it and make it an even better place. Our job is to help them make a difference.