The World Trade Organization (WTO) is an international association of 155 countries that serves as a venue for establishing new trade agreements and for resolving disputes between members. Members of the WTO agree to negotiate with other members as equal partners, regardless of the country. This is called the "most favored nation" rule. That is, if a member nation wishes to make a trade offer to another member nation, it must also make that offer to any and all other member nations. The WTO also requires members to eliminate quota systems, although tariffs may still be imposed.
The WTO operates a "Dispute Settlement Body" that has the function of dealing with disagreements that occur between member nations. These include such things as when a member nation breaks the most favored nation rule, or other WTO membership requirements. It also allows nations to seek redress for unfair competition, such as the practice of "dumping" where a particular nation floods international markets with a large quantity of a particular good which can severely reduce demand for the same product from domestic producers. In practice, this is sometimes difficult to discern from the typical changes in markets that occur when nations agree to accept imports from other countries.
Because the WTO has become the predominant vehicle for establishing international trade agreements, it has become a symbol of the globalization phenomenon. This has made the WTO a focus point for activists who object to effects of globalization of markets, such as environmental and human-rights oriented groups.
A comparative advantage is a circumstance when the economy of a country can produce more of a certain good (or service) at a lower loss of production in other goods, relative to other countries. Having a comparative advantage enables that country to increase production of a specialized good, and trade it for greater quantities of other goods than it could otherwise produce on its own. In contrast, a comparative disadvantage means that the economy of a country requires a higher opportunity cost, or shift in its resources, to increase production of a particular good. The loss of production of other goods needed to yield a unit of the disadvantaged good represents a higher cost than what would be needed to import it.
Consider an example comparative advantage might be used to benefit two trading partners in a classroom setting. Suppose that an assignment for an introductory course in a law school is required, and the instructor has allowed students to work in groups of two, though they must still submit reports individually. The assignment requires a certain amount of case review, and a certain amount of analysis. Suppose that a student groups has two members who are each adept at one of these tasks but less skillful at the other. In other words, each has a comparative advantage:
• Student 1 has a comparative advantage in case review. This student needs one hour to prepare a page of review, but two hours to prepare a page of analysis.
• Student 2 has a comparative advantage in analysis. This student needs one hour to prepare a page of analysis, but two hours to prepare a page of review.
To earn an "A" on the project, each student needs three pages of review and analysis. If two pages of each are submitted, the score will be "B". If any less than two pages of review or analysis are submitted, the score will be "C." A total of six hours are available for each student to work.
If each student works independently, in order to get a score of "B", they will have to invest four hours to get the minimum of two pages of whichever task they require more time doing (at two hours per page)-that is, the task that they have a comparative disadvantage in. This leaves them with two hours to complete the other task, which yields two pages. This results in a "B" score for each student.
However, if they trade labor, they can each benefit. If Student 1 agrees to work 3 hours to write review for Student 2's report, in exchange for Student 2 working 3 hours to write analysis for Student 1's report, then each would be producing 6 pages of the task which they have a comparative advantage in. Then, by trading 3 pages of one for 3 pages for the other, each can obtain the required number of pages to earn an "A" for the assignment. This is illustrated graphically by the following figure.
In each chart, the red line shows the production possibilities for either student without trading. The region for attaining an "A" is beyond this curve; each student cannot produce more than 2 pages of one type of page without losing another. However, if they trade, the consumption possibilities expands outward so that the "A" condition can be attained.
The total flow of money into or out of a country within a given time period (usually a year) evaluates how a country performs with respect to the global economy. In such an analysis, one considers the total expenses and total income of a country in terms of transactions with all foreign countries. The expenses and sources of income can be separated into two categories. The first is the current account , which considers items such as goods and services. These represent immediate transactions that have few lingering effects. An example would be the purchase of merchandise from a foreign manufacturer. The second is the capital account , which considers assets. These are purchases that are more of an investment and which tend to have lasting effects. An example would be the purchase of commercial real estate in a foreign country.
Expenses occur when goods are imported from or assets are purchased in foreign countries, and additionally when individuals send money to others overseas. This requires that the domestic buyer acquire enough foreign currency to conclude the transaction. Similarly, income accumulates when goods are exported, or domestic assets are purchased by foreign buyers, or goods and services are sold overseas to foreign buyers. These require that foreign buyers acquire enough domestic currency to complete those transactions.
The demand for foreign currency strongly influences foreign trade because the demand and supply relationship determines whether buyers in either country can obtain enough of the needed currency to conclude the transaction. When the foreign currency increases in value relative to the domestic currency, it becomes more difficult to import goods from the foreign country (since they are more expensive), but it becomes easier to export goods to the foreign country (since they are cheaper).