Most countries trade more on international markets today than ever before – both in absolute terms and as a proportion of their national output. How can we explain this phenomenal increase in international trade over the past few decades? Will the recent rise in oil prices reverse this trend of globalization?

History provides us with a natural comparison. Beginning in the nineteenth century, the world saw a remarkable rise in international trade that came to a grinding halt during World War I and later on in the wake of the Great Depression. This “first wave of globalization” from about 1870 until 1913 led to a degree of international integration – measured by trade-to-output ratios – which many countries only achieved again in the mid-1990s.

Taking a comparative perspective, we juxtapose the first wave of globalization from 1870 to 1913 and the second wave after World War II. We also study the retreat of world trade during the interwar period from 1921 to 1939. We are interested in the driving forces behind these trade booms and trade busts. Was it changes in global output or changes in trade costs that explain the evolution of international trade?

I.2. INTERNATIONAL TRADE- DEFINED

International trade is exchange of capital, goods, and services across international borders or territories. In other word, to know what is happening in the course of international trade, governments keep track of the transactions among nations.

I.3. REASONS FOR INTERNATIONAL TRADE

The first theory section of this course contains explanations or reasons that trade takes place between countries. The six basic reasons why trade may take place between countries are summarized below.