Chapter 23: Problem 35

If countries reduced trade barriers, would the international flows of money increase?

Short Answer

Expert verified

Reducing trade barriers would likely lead to an increase in international flows of money, as it encourages both import and export activities, boosting trade between nations. However, this may also have potential negative effects on domestic businesses due to increased competition.

Step by step solution

Understand Trade Barriers

Trade barriers are governmental restrictions imposed on the exchange of goods and services between countries. They come in various forms such as tariffs, quotas, embargoes, non-tariff barriers, voluntary export restraints and local content requirements. These barriers are imposed to protect domestic industries, products, and jobs by making foreign goods more expensive in comparison.

Understand International Flows of Money

The international flow of money is the movement of capital across national borders in the form of portfolio investments, direct investments, and other forms of capital that is manipulated by the exchange rate. It is influenced by various factors such as trade, interest rates, political stability, economic prospects, and policies of the nations involved.

Reduction of Trade Barriers and the Impact on International Flows of Money

When trade barriers are reduced, the cost for foreign goods decreases, making them more competitive on the domestic market. This can lead to an increase in imports. Likewise, the reduction of trade barriers can also make it easier and more beneficial for businesses in a country to export products, hence, increasing exports. The increased trade (import and export) activity amplifies the flow of money across borders, thereby increasing the international flow of money.

Evaluate the Relation

Therefore, it can be stated that if countries reduced trade barriers, the international flows of money would likely increase. This is because reducing trade barriers encourages both import and export activities, boosting trade between nations, which in turn intensifies the international flow of money. However, it is essential to remember that though reducing trade barriers can provide an overall benefit, it may also lead to potential harm to some domestic businesses due to increased competition.

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