INTERNATIONAL

ECONOMICS

Balance Of Payments

The balance of payments is a summary statement which, (in

principle) records all the economic transactions between the
residents of the country concerned with the residents of all other
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countries during a particular period of time, usually a calendar

year.

As a summary statement , the balance of payments aggregates all

merchandise trade into a few major categories, the transactions of
the residents of a nation with the rest of the world cannot appear
individually in the bop. Similarly, only the net balance of each type
of international capital flow is included. An international
transaction refers to the exchange of a good, service, or asset (for
which payment is usually required) between the residents of one
nation and the residents of other nations. However, gifts and
certain other transfers (for which no payment is required) are also
included in a nation’s balance of payments.

The question of who is a resident of a nation also requires some

clarification. Here, 'residents' are broadly interpreted as all
individuals, businesses, and governments and their agencies.
International institutions such as the United Nations, the
International Monetary Fund (IMF), the World Bank, and the World
Trade Organization (WTO) are not residents of the nation in which
they are located, they are also classified as 'foreign' residents for
this purpose. Furthermore, the balance of payments includes
some transactions in which the residents of foreign nations are not
directly involved— for example, when a nation’s central bank sells
a portion of its foreign currency holdings to the nation’s
commercial banks.

Diplomats, military personnel, tourists, and workers who

temporarily migrate are residents of the nation in which they hold
citizenship. Similarly, a corporation is the resident of the nation in
which it is incorporated, but its foreign branches and subsidiaries
are not. Some of these distinctions are, of course, arbitrary and
may lead to difficulties. For example, a worker may start by
emigrating temporarily and then decide to remain abroad
permanently.

Also to be remembered is that the balance of payments has a time

dimension. Thus, it is the flow of goods, services, gifts, and assets
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between the residents of a nation and the residents of other

nations during a particular period of time, usually a calendar year.

The main purpose of the balance of payments is to inform the

government of the international position of the nation and to help
it in its formulation of monetary, fiscal, and trade policies.
Governments also regularly consult the balance of payments of
important trade partners in making policy decisions. The
information contained in a nation’s balance of payments is also
indispensable to banks, firms, and individuals directly or indirectly
involved in international trade and finance.

The balance of payments accounts of any country focuses

exclusively on the relationship of the country with the rest of the
world. The balance-of-payments accounts are an integral part of
the national income accounts for an open economy. Open-
economy accounts are divided into five sub-accounts, namely
Firm, House hold, Capital, Government, and Rest of the World. The
purpose of the balance of payments accounts is to examine in
more detail the final, Rest of the World account.

BOP- Accounting Frameworks

International transactions are classified as credits or debits. The
arrangement of international transactions into a balance-of-
payments account requires that each transaction be entered as a
credit or a debit. Credit transactions are those that involve the
receipt of payments from foreigners. Debit transactions are those
that involve the making of payments to foreigners. Credit
transactions are entered with a positive sign, and debit
transactions are entered with a negative sign in the nation’s
balance of payments. A country’s balance of payments accounts
keep track of both its payments to and its receipts from
foreigners.

From the U.S. perspective, the following transactions are credits

(+), leading to the receipt of dollars from foreigners:

• Merchandise exports
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• Transportation and travel receipts

• Income received from investments abroad(dividends, interest,

etc)

• Gifts received from foreign residents

• Aid received from foreign governments

• Investments in the United States by overseas residents

Conversely, the following transactions are debits (-) from the U.S.
viewpoint because they involve payments to foreigners:

• Merchandise imports

• Transportation and travel expenditures

• Income paid on the investments of foreigners(payment of

dividends, interest, etc to foreign investors)

• Gifts to foreign residents

• Aid given by the U.S. government

• Overseas investment by U.S. residents

Double-Entry Bookkeeping

In recording a nation’s international transactions, the accounting

procedure known as double-entry bookkeeping is used. This
means that each international transaction is recorded twice, once
as a credit and once as a debit of an equal amount. The reason for
this is that every international transaction involves an exchange of
assets and so has both a credit and a debit side. We sell
something and we receive payment for it. We buy something and
we have to pay for it. Each credit entry is balanced by a debit
entry, and vice versa, so that the recording of any international
transaction leads to two offsetting entries.

If we do this in a proper way debits and credits will always be

equal, so that in an accounting sense the balance of payments will
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always be in balance. An accounting balance is however not

synonymous with equilibrium. An overall balance, with inflows of
foreign currency equaling outflows, may conceal imbalances
within it that will lead to changes. In such a case we do not have
an equilibrium in any meaningful sense.

If we add up all the credits as pluses and all the debits as

minuses, the net result is zero; that is, the total credits must
always equal the total debits. This result means that the total
balance-of-payments account must always be in balance. There is
no such thing as an overall balance-of-payments surplus or deficit.
Even though the entire balance of payments must numerically
balance by definition, it does not necessarily follow that any single
subaccount or subaccounts of the statement must balance. For
instance, total merchandise exports may or may not be in balance
with total merchandise imports. When reference is made to a
balanceof-payments surplus or deficit, it is particular subaccounts
of the balance of payments that are referred to, not the overall
value. A surplus occurs when the balance on a subaccount
(subaccounts) is positive; a deficit occurs when the balance is
negative.

It is also important to note that, although they have their roots in

double-entry accounting, balance-of-payments accounts are rarely
presented in that form. In basic terms, the accounts usually gather
together the transactions that give rise to the balancing monetary
flows under what are considered to be appropriate headings (e.g.
exports), and record them first. The net values of the monetary
flows (again perhaps grouped under various headings) are then
entered in the same column, with their sign reversed. We thus
have an account in a single column, which must sum to zero.
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Example

BOP Accounts

A) Current Account

The current account of the balance of payments refers to the

monetary value of international flows associated with transactions
in goods, services, income flows, and unilateral transfers.

Merchandise trade includes all of the goods the concerned

country exports or imports: agricultural products, machinery,
autos, petroleum, electronics, textiles, and the like. Exports,
whether of goods or services, are by convention entered as
positive items in the account. Imports accordingly are entered as
negative items. Exports are normally calculated f.o.b. (free on
board), i.e. costs for transportation, insurance, etc., are not
included, whereas imports are normally calculated c.i.f (cost,
insurance, freight) , i.e. transportation, insurance costs, etc., are
included. Combining the exports and imports of goods gives the
merchandise trade balance. When this balance is negative, the
result is a merchandise trade deficit; a positive balance implies a
merchandise trade surplus. By convention, a surplus is often
referred to as “favorable” and a deficit is referred to as
“unfavorable”—terms carried over from the period of Mercantilism
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Balance-of-payments accounts usually differentiate between trade

in goods and trade in services. The balance of exports and imports
of the former is referred to in the UK accounts as the balance of
visible trade ; in other countries it may be referred to as the
balance of merchandise trade, or simply as the balance of trade.
The net balance of exports and imports of services is called the
balance of invisible trade in the UK statistics.

Invisible trade is a much more heterogeneous category than is

visible trade. It includes the invisible items(that are not tangible)
in the BoP. It is broadly categorized into 3 groups: non-factor
services, factor services and transfers which doesn’t involve any
value in exchange. It includes shipping, banking and insurance
services, tourist expenditures (payments by residents as tourists
abroad) which are usually the most important, is in economic
terms little different from trade in goods. That is, exports and
imports of such services are flows of outputs whose values will be
determined by the same variables that would affect the demand
and supply for goods . Other services include transfers of goods
under military programs, construction services, consultancy
services, legal services, technical services, and the like. Factor
services, which consist in the main of interest, profits and
dividends, are on the other hand payments for inputs. Exports and
imports of such services will depend in large part on the
accumulated stock of past investment in and borrowing from
foreign residents.

Broadening our balance-of-payments summary further, we must

include these income receipts and payments . Income, is made up
mostly of international interest and dividend payments and the
earnings of domestically owned firms operating abroad. It consists
of the net earnings (dividends and interest) on the country’s
investments abroad—that is, earnings on the country’s
investments abroad less payments on foreign assets in the
concerned nation. If you own a share of a German firm’s stock and
receive a dividend payment of $5, that payment shows up in the
accounts as a U.S. investment income receipt of $5. Exports and
imports of such services will depend in large part on the
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accumulated stock of past investment in and borrowing from

foreign residents. It also includes compensation to employees.

Also, the balance-of-payments summary is expanded to include

unilateral transfers. These items include transfers of goods and
services (gifts in kind) or financial assets (money gifts) between
the concerned country and the rest of the world. Also called
unrequited receipts, these are receipts which the residents of a
country receive 'for free', without having to make any present or
future payments in return. Receipts from abroad are entered as
positive items, payments abroad as negative items. This kind of
receipt usually takes two forms. The first, often referred to as
private unrequited transfers, is gifts which domestic residents
receive from foreign residents, most notably when migrant
workers send money back to relatives living in the country in
question. It can also include a birthday present sent to a friend
overseas, or a contribution by the resident of the concerned
country to a relief fund for underdeveloped nation and vice versa.
Governmental transfers/official unrequited transfers is the
payment of 'pure' aid (as opposed to 'tied' aid) by governments in
developed countries (perhaps via an international agency) to
government in less-developed countries (LDCs). It refer to gifts or
grants made by one government to foreign residents or foreign
governments.

To get a broader understanding of the international transactions

of a country, these services must be added to the merchandise
trade account. This total gives the goods and services balance .
When this balance is positive, the result is a surplus of goods and
services transactions; a negative balance implies a deficit. If the
goods and services account show a surplus, the country has
transferred more resources (goods and services) to foreigners
than it has received from them over the period of one year.
Besides measuring the value of the net transfer of resources, the
goods and services balance also furnishes information about the
status of a nation’s gross domestic product (GDP). This is because
the balance on the goods and services account is defined
essentially the same way as the net export of goods and services,
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which is part of a nation’s GDP. GDP is equal to the value of the

goods and services produced in an economy over a period of time.
In an economy with trade, GDP is equal to the sum of four
different types of spending in the economy: consumption, gross
investment, government spending, and net exports of goods and
services. In effect, net exports represent the value of goods and
services that are produced domestically but not included in
domestic consumption.

For a nation’s GDP, then, the balance on the goods and services
account can be interpreted as follows. A positive balance on the
account shows an excess of exports over imports, and this
difference must be added to the GDP. When the account is in
deficit, the excess of imports over exports must be subtracted
from the GDP. If a nation’s exports of goods and services equal its
imports, the account will have a net imbalance of zero and will not
affect the status of the GDP. Therefore, depending on the relative
value of exports and imports, the balance on the goods and
services account contributes to the level of a nation’s national
product.

B) Capital & Financial Account

Capital and financial transactions in the balance of payments

include all international purchases or sales of assets. The term
assets is broadly defined to include items such as titles to real
estate, corporate stocks and bonds, government securities, and
ordinary commercial bank deposits. The capital and financial
account includes both private-sector and official (central bank)
transactions. Capital transactions consist of capital transfers and
the acquisition and disposal of certain nonfinancial assets. The
major types of capital transfers are debt forgiveness and
migrants’ goods and financial assets accompanying them as they
leave or enter the country. The acquisition and disposal of certain
nonfinancial assets include the sales and purchases of rights to
natural resources, patents, copyrights, trademarks, franchises,
and leases.
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The following are examples of private-sector financial

transactions:

Direct Investment: Direct investment occurs when residents of one

country acquire a controlling interest (stock ownership of ten
percent or more) in a business enterprise in another country.

Securities: Securities are private-sector purchases of short- and

long-term debt securities, such as Treasury bills, Treasury notes,
Treasury bonds, and securities of private enterprises.

All these securities come under portfolio investments. Portfolio

investment is the acquisition of an asset that does not give the
purchaser control. It includes long-term debt and equity securities,
money market debt instruments, and tradeable financial
derivatives, including currency and interest rate swaps. An
obvious example is the purchase of shares in a foreign company
or of bonds issued by a foreign government. Loans made to
foreign firms or governments come into the same broad category.
Such portfolio investment is often also distinguished by the period
of the loan (short, medium or long are conventional distinctions,
although in many cases only the short and long categories are
used). the distinction between short-term and long-term
investment is often confusing, but usually relates to the
specification of the asset rather than to the length of time for
which it is held. For example, a firm or individual that holds a bank
account in another country and increases its balance in that
account will be engaging in short-term investment, even if its
intention is to keep that money in that account for many years. On
the other hand, an individual buying a long-term government bond
in another country will be making a long-term investment, even if
that bond has only one month to go before maturity. Portfolio
investments can also be identified as either private or official,
according to the sector from which they originate.

Bank Claims and Liabilities: Bank claims consist of loans, overseas

deposits, acceptances, foreign commercial paper, claims on
affiliated banks abroad, and foreign government obligations. Bank
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liabilities include demand deposits and NOW (negotiable order of

withdrawal) accounts, passbook savings deposits, certificates of
deposit, and liabilities to affiliated banks abroad.

Capital and financial transactions are recorded in the balance-of-

payments statement by applying a plus sign (credit) to capital and
financial inflows and a minus sign (debit) to capital and financial
outflows. Any transaction that leads to the home country’s
receiving payments from foreigners can be regarded as a credit
item. A capital (financial) inflow can be likened to the export of
goods and services. Conversely, any transaction that leads to
foreigners receiving payments, it is considered a debit item for
home countries. A capital (financial) outflow is similar in effect to
the import of goods and services.

Besides including private-sector transactions, the capital and

financial account includes official settlements transactions of the
home country’s central bank. Official settlements transactions
refer to the movement of financial assets among official holders.
These financial assets fall into two categories: official reserve
assets (U.S. government assets abroad) and liabilities to foreign
official agencies (foreign official assets in the United States).

Official international reserves are foreign assets held by central

banks as a cushion against national economic misfortune. These
assets include foreign exchange (currency, deposits, and
securities), monetary gold, SDRs, and the country’s reserve
position in the IMF. Reserve assets are under the effective control
of the monetary authorities and can be used either directly (to
finance payment imbalances), or indirectly (to regulate
imbalances by, for instance, intervening in foreign exchange
markets to support the value of the currency). Transactions with
the IMF affect both reserve assets and reserve liabilities.

Official holdings of reserves are used for two purposes. First, they
afford a country sufficient international liquidity to finance short-
term trade deficits and weather. periodic currency crises. This
liquidity function is usually only important to developing countries
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that do not have a readily convertible currency or ready access to

international capital markets on favorable terms. Second, central
banks sometimes buy or sell official reserve assets in private-
sector markets to stabilize their currencies’ exchange rates. For
countries with fixed exchange rates, changes in reserves can be
large as reserves are bought or sold through foreign exchange
intervention. Official settlements transactions also include
liabilities to foreign official holders. These liabilities refer to
foreign official holdings with U.S. commercial banks and official
holdings of U.S. Treasury securities. Foreign governments often
wish to hold such assets because of the interest earnings they
provide.

The remaining items in the balance of payments

The balance-of-payments accounts are completed by the entry of:
other minor items that can be identified but do not fall
comfortably into one of the standard categories; errors and
omissions, which reflect transactions that have not been recorded
for various reasons and so cannot be entered under a standard
heading, but which we know must appear since the full balance-of-
payments account must sum to zero; and changes in official
reserves and in official liabilities that are part of the reserves of
other countries.

The data-collection process that underlies the published balance-

of-payments figures is far from perfect. The cost of collecting
balance-of-payments statistics is high, and a perfectly accurate
collection system would be prohibitive in cost. Hence statisticians
do not have a system whereby they can simultaneously record the
credit and debit side of each transaction, such information for any
particular transaction tends to come from different sources. Large
numbers of transactions fail to get recorded. Government
statisticians thus base their figures partly on information collected
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and partly on estimates. When statisticians sum the credits and

debits, it is not surprising when the two totals do not match.
Because total debits must equal total credits in principle,
statisticians insert a residual to make them equal. This corrected
entry is known as statistical discrepancy, or errors and omissions.
In the balance-of-payments statement, statistical discrepancy is
treated as part of the capital and financial account because short-
term financial transactions are generally the most frequent source
of error.

Errors and omissions (or the balancing item) reflect the difficulties
involved in recording accurately, if at all, a wide variety of
transactions that occur within a given period (usually 12 months).
In some cases there is such a large number of transactions that a
sample is taken rather than recording each transaction, with the
inevitable errors that occur when samples are used. In others
problems may arise when one or other of the parts of a
transaction takes more than one year: for example with a large
export contract covering several years some payment may be
received by the exporter before any deliveries are made, but the
last payment will not be made until the contract has been
completed. Dishonesty may also play a part, as when goods are
smuggled, in which case the merchandise side of the transaction
is unreported although payment will be made somehow and will
be reflected somewhere in the accounts. Similarly, the desire to
avoid taxes may lead to under-reporting of some items in order to
reduce tax liabilities.

Finally, there are changes in the reserves of the country whose

balance of payments we are considering, and changes in that part
of the reserves of other countries that is held in the country
concerned. Reserves are held in three forms: in foreign currency,
usually but not always the US dollar, as gold, and as Special
Deposit Receipts (SDRs) borrowed from the IMF. Note that
reserves do not have to be held within the country. Indeed most
countries hold a proportion of their reserves in accounts with
foreign central banks. The changes in the country's reserves must
of course reflect the net value of all the other recorded items in
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the balance of payments. These changes will of course be

recorded accurately, and it is the discrepancy between the
changes in reserves and the net value of the other recorded items
that allows us to identify the errors and omissions.

Central banks often buy or sell international reserves in private

asset markets to affect macroeconomic conditions in their
economies. Official transactions of this type are called official
foreign exchange intervention. One reason why foreign exchange
intervention can alter macroeconomic conditions is that it is a way
for the central bank to inject money into the economy or withdraw
it from circulation. Government agencies other than central banks
may hold foreign reserves and intervene officially in exchange
markets. The U.S. Treasury, for example, operates an Exchange
Stabilization Fund that at times has played an active role in
market trading.

When a central bank purchases or sells a foreign asset, the

transaction appears in its country’s financial account just as if the
same transaction had been carried out by a private citizen.

Example: A transaction in which the central bank of Japan (the

Bank of Japan) acquires dollar assets might occur as follows: A
U.S. auto dealer imports a Nissan sedan from Japan and pays the
auto company with a check for $20,000. Nissan does not want to
invest the money in dollar assets, but it so happens that the Bank
of Japan is willing to give Nissan Japanese money in exchange for
the $20,000 check. The Bank of Japan’s international reserves rise
by $20,000 as a result of the deal. Because the Bank of Japan’s
dollar reserves are part of total Japanese assets held in the United
States, the latter rise by $20,000. This transaction therefore
results in a $20,000 credit in the U.S. financial account, the other
side of the $20,000 debit in the U.S. current account due to the
import of the car.

The level of net central bank financial flows is called the official
settlements balance. This balance is the sum of the current
account and capital account balances, less the non-reserve
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portion of the financial account balance, and it indicates the

payments gap that official reserve transactions need to cover.

Balance of payments: surpluses and deficits

o Autonomous and accommodating items

Transactions are said to be autonomous if their value is

determined independently of the balance of payments.
Accommodating items on the other hand are determined by the
net consequences of the autonomous items. An alternative
nomenclature is that items are 'above the line' (autonomous) or
'below the line' (accommodating). Obviously, the sum of the
accommodating and autonomous items must be zero, since all
entries in the balance-of-payments accounts must come under
one of the two headings.

It refers to international economic transactions that take place in

the pursuit of ordinary economic goals such as profit maximization
by firms and utility maximization by individuals. These
transactions are undertaken independently of the state of the
country’s balance of payments. The term accommodating items in
the balance of payments refers to transactions that occur because
of other activity in the balance of payments, that is, the
government items.

Whether the balance of payments is in surplus or deficit then

depends on the balance of the autonomous items. The balance of
payments is said to be in surplus if autonomous receipts are
greater than autonomous payments, and in deficit if autonomous
receipts are less than autonomous payments.

The balance of payments (BoP) is an important indicator of a

country's economic transactions with the rest of the world.
Disequilibrium in the balance of payments occurs when there is an
imbalance between a country's exports and imports, capital
inflows and outflows, or other financial transactions. Here are
some of the main causes of disequilibrium in the BoP:
1. Structural Factors
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 Changes in Consumer Preferences: Shifts in domestic and

foreign consumer preferences can affect the demand for
exports and imports.
 Technological Advances: Innovations can alter production
processes and trade patterns, leading to temporary
imbalances.
 Global Economic Changes: Economic growth or recession in
major trading partners can influence export and import
levels.
2. Economic Factors
 Inflation: Higher domestic inflation compared to trading
partners makes exports more expensive and imports
cheaper, worsening the trade balance.
 Exchange Rates: Exchange rate fluctuations can impact the
competitiveness of exports and the cost of imports.
 Interest Rates: Differences in interest rates between
countries can attract or repel foreign investments, affecting
capital flows.
3. Political Factors
 Trade Policies: Tariffs, quotas, and trade embargoes can
disrupt normal trade flows and cause imbalances.
 Political Stability: Political instability or uncertainty can deter
foreign investment and affect trade relations.
 Government Spending: High levels of government spending,
particularly on imports, can lead to imbalances.
4. Natural Factors
 Natural Disasters: Events like earthquakes, floods, or
pandemics can disrupt production and trade.
 Resource Availability: Changes in the availability of natural
resources, such as oil, can affect export and import levels.
5. Speculative Factors
 Speculative Capital Movements: Investors moving large sums
of money in and out of a country in search of short-term
gains can cause capital account imbalances.
 Expectations of Currency Depreciation: If investors expect a
currency to depreciate, they may move assets out of the
country, causing outflows.

Comparative Advantage Theory

The theory of comparative advantage, developed by David
Ricardo in the early 19th century, is a cornerstone of
international trade theory. It explains how and why
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countries benefit from trading with each other by

specializing in the production of goods and services in
which they have a comparative, rather than absolute,
advantage.
Basic Concepts
1. Absolute Advantage: When a country can produce a
good more efficiently (using fewer resources) than
another country.
2. Comparative Advantage: When a country can produce
a good at a lower opportunity cost compared to
another country, even if it doesn't have an absolute
advantage in producing that good.
Assumptions
1. Two Countries and Two Goods: The model assumes
there are only two countries producing and trading
two goods.
2. Labor as the Only Factor of Production: Labor is the
only input considered, and it is immobile between
countries but perfectly mobile within a country.
3. Constant Returns to Scale: There are no economies of
scale, meaning that doubling the input exactly doubles
the output.
4. No Transportation Costs: It is assumed that there are
no costs associated with transporting goods between
countries.
5. Full Employment: The model assumes that all available
resources are fully employed.
6. Perfect Competition: The markets are assumed to be
perfectly competitive, with no trade barriers or
monopolistic practices.
Example
Consider two countries, Country A and Country B, both
producing two goods, wine and cloth. Let's assume the
following:
 In Country A, 1 unit of labor produces 5 units of wine
or 10 units of cloth.
 In Country B, 1 unit of labor produces 4 units of wine
or 8 units of cloth.
To see who has the comparative advantage, we need to
look at the opportunity costs:
 Country A:
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o Opportunity cost of 1 unit of wine = 10/5 = 2 units

of cloth.
o Opportunity cost of 1 unit of cloth = 5/10 = 0.5
units of wine.
 Country B:
o Opportunity cost of 1 unit of wine = 8/4 = 2 units
of cloth.
o Opportunity cost of 1 unit of cloth = 4/8 = 0.5
units of wine.
Both countries have the same opportunity costs for each
good, suggesting neither has a comparative advantage in
this simplified example. However, the principle remains: if
there were differences, the country with the lower
opportunity cost for a good should specialize in that good.
Implications
1. Specialization: Countries should specialize in
producing goods where they have a comparative
advantage, thereby increasing overall economic
efficiency.
2. Trade Benefits: By trading, countries can consume
more than they would in isolation, leading to
increased welfare.
3. Resource Allocation: Comparative advantage leads to
a more efficient allocation of resources globally.
Criticisms
1. Unrealistic Assumptions: The model's assumptions
(e.g., two goods, no transportation costs) are often
unrealistic in the real world.
2. Static Model: It doesn't account for dynamic changes,
such as technological advancements or changes in
consumer preferences.
3. Factor Mobility: The assumption that labor is immobile
between countries but perfectly mobile within
countries doesn't hold true in reality.
4. Distribution Effects: The model overlooks the
distributional impacts of trade, such as job losses in
certain sectors or regions.
5. Environmental and Ethical Concerns: The focus on
efficiency and cost can overlook environmental
degradation and ethical issues in production practices.
Mathematical Representation
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Consider the production possibilities of the two countries

(Country A and Country B) with given labor inputs:
 Country A:
o Wine: WA=5LW_A = 5L
o Cloth: CA=10LC_A = 10L
 Country B:
o Wine: WB=4LW_B = 4L
o Cloth: CB=8LC_B = 8L
Where LL is the labor input.
The opportunity cost of producing one good over the other
is calculated as shown earlier. Using these opportunity
costs, countries should specialize in the production of
goods where they have a lower opportunity cost
(comparative advantage) and trade to achieve a better
overall outcome.