International Trade
International trade refers to all exchanges of goods and services between national economies. Mankiw devotes foundational chapters to it, demonstrating that the principle of comparative advantage — each country benefits from specializing in the goods for which its opportunity cost is lowest — is one of the most robust propositions in economics.
Last updated: 8 July 2026
Definition
DefinitionInternational trade rests on the exchange of goods and services between countries. The trade balance measures the difference between exports (goods and services sold abroad) and imports (goods and services bought from abroad). A trade surplus means the country exports more than it imports; a trade deficit indicates the opposite.
International trade is a positive-sum game: both trading partners gain from exchange, even when one of them is more efficient in producing every good. This result rests on the concept of comparative advantage, distinct from absolute advantage. Capital flows — which belong, for their part, to the balance of payments — are linked to trade by the identity NX = S − I, where NX is net exports, S is national saving, and I is investment. The balance of payments, broader than the trade balance, records all of a country's transactions with the rest of the world, including financial flows and transfers.
Why it matters
The principle of comparative advantage is one of the most fundamental contributions of economics. Almost all economists agree on the benefits of free trade, even while acknowledging its distributional effects: some sectors and workers suffer from foreign competition in the short run, which calls for supporting policies (retraining, education, social safety nets).
Protectionism, though politically popular, generates a deadweight loss for the economy: consumers pay higher prices, productive resources are misallocated, and trade retaliation by partners can cancel out the expected gains.
Key points
International trade enables a more efficient allocation of world resources: each country devotes itself to the production where it is relatively most efficient, which increases total world output
The gains from trade are not equally distributed within a country: according to the Stolper-Samuelson theorem, free trade benefits the abundant factor of production (low-skilled labor in developing countries, capital and skilled labor in advanced countries) and disadvantages the scarce factor
Exchange rates have a direct effect on competitiveness: a weak currency makes exports cheaper and imports more expensive, which tends to improve the trade balance — provided that traded volumes respond sufficiently to prices (the Marshall-Lerner condition). In the short run the price effect often dominates: the balance first deteriorates before improving (the J-curve). The reverse holds with a strong currency
Mankiw insists in his recent editions on distinguishing legitimate arguments for protectionism (national security, infant industries) from fallacious ones (protection against "unfair competition" from low-wage countries)
Concrete example
ExamplesGermany displays an important structural trade surplus: it collapsed to about €80 bn in 2022 under the impact of surging energy prices, before rebounding to €209 bn in 2023 and about €240 bn in 2024, thanks to the competitiveness of its manufacturing industry (automobiles, machine tools, chemicals). Conversely, the United States posts a chronic trade deficit: $918 billion in 2024 for goods and services — a goods deficit of about $1.2 trillion partially offset by a services surplus. Its main bilateral imbalance is with China: about $295 billion on goods alone in 2024, i.e. nearly a quarter of the US goods deficit. The Sino-American trade war launched in 2018 (tariffs of up to 25% on some $250 billion of Chinese imports, a final tranche being lowered to 7.5% after the 2020 "Phase One" agreement) moved to an entirely different scale in 2025: the United States introduced a 10% floor tariff on nearly all of its imports, with much higher surcharges by country and sector (peaking at 145% on China in spring 2025, before a negotiated de-escalation), bringing the average US tariff to its highest level since the 1930s. These episodes illustrate the risks of modern protectionism: disruption of supply chains, higher prices for consumers, and uncertainty for firms.
Mankiw anecdote
MankiwMankiw illustrates comparative advantage with the famous example of the farmer and the rancher: even if the farmer is more efficient than the rancher at producing both potatoes and meat, both gain from specializing and trading, because their opportunity costs differ. The underlying principle, formulated by David Ricardo in 1817 (using the example of English cloth and Portuguese wine), remains as relevant in the 21st century as it was two centuries ago.
Market impact
MarketsTrade balance data and trade policy developments directly influence currency markets: a structural trade surplus tends to strengthen the domestic currency, while a chronic deficit weakens it. Trade tensions (tariffs, sanctions, trade wars) generate volatility on equity markets, particularly for exporting firms and sectors dependent on global supply chains. Commodity markets are also affected, as trade restrictions can disrupt global supply and demand.