International vs. Domestic Trade
Trading across frontiers involves people and firms living in different nations. Each nation is a sovereign entity which regulates the .flow of people, goods, and finance crossing its borders, This contrasts with domestic trade, where there is a,single currency, where trade and money flow freely within the borders, and where people can migrate easily to seek new opportunities. In international trade, political barriers to trade are sometimes erected when affected groups object. to foreign trade and nations impose tariffs or quotas. This practice, called protectionism , is analyzed at the end of this chapter. S. Exchange rates. Most nations have their own currencies. I want to pay’for a Japanese car in dollars, while Toyota wants to be paid in Japanese yen. Dollars are bought and sold for yen according to the exchange.rate, which is the relative price of different currencies (such as the price of Japanese yen in terms of U.S. dollars).
The international financial system’ must ensure a smooth flow and exchange of dollars, yen, and other currencies or else risk a breakdown in trade. The financial aspects of international trade are analyzed i,n the chapters on macroeconomics.
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