Handout – Trade
Why do we trade?
How is the global trading system governed?
Comparative Advantage: A liberal theory of trade that says that states should produce and exports only
those goods that they can produce most efficiently, and import those they can produce less
Balance of Trade: The difference in monetary value between a country’s exports and imports. If
exports are greater than imports, a state is in a balance of trade surplus; if its imports exceed its
exports, it is in a balance of trade deficit.
Balance of Payments: All the flows of money in and out of a country. Includes the balance of trade
(current account), capital flows (including foreign direct investment and portfolio investment) and
changes in reserves. Money going in must equal money going out.
Hegemonic Stability Theory: A realist theory which holds that the norms of the liberal economic trading
system must be upheld by a hegemon who has both the will and the capacity to enforce the rules. In
the economic context, Charles Kindleberger argued the hegemon must:
a) Guarantee an open market
b) Act as lender of last resort (counter-cyclical lending)
c) Act as reserve currency