While international trade involves the international shipment of an incredibly diverse range of goods and services—from cars, furniture, and insurance to umbrella knobs, pedestal actuators, holiday ornaments, and tax preparation services—not all products and services are internationally traded. Those products or services that are not exported are called nontraded goods.
There are two reasons that goods are not traded. The first reason is obvious: it is impossible to ship certain products from one country to another. A haircut is the prototypical example of a nontraded good. This service cannot be ordered for international shipment; the customer must travel to another country to visit a foreign barber, or the barber must travel to cut the customer’s hair in the customer’s country.
The second category of nontraded goods involves products that could be transported internationally but remain nontraded because the economic benefits of international trade are offset by the costs of trade. For example, while cement can be exported, it is generally unprofitable to do so because of the high transportation costs of moving such a heavy and bulky product. Thus, some products will be traded between countries that are close to each other and have low trade costs, while the same products will not be traded between countries that have high trade costs due to their distance from each other. In addition to transportation costs, other barriers to trade—such as tariffs or quotas, the inability to ship a product in a timely manner, or the inability to ship a product before it spoils, also cause a number of products to remain nontraded.
Nontraded goods may become traded goods when the original impediments to international trade decline sufficiently to make international trade profitable. In addition, advances in technology reduce the range of products that are nontraded. For example, since optimal patient care requires physicians to rapidly diagnosis an illness or assess the severity of an injury, the reading of X-rays was originally performed by local radiologists in the patient’s and doctor’s country of residence. As a result, the need for immediate assessment and evaluation of X-ray results caused diagnostic services to be internationally nontraded. However, radiological services became tradable when improvements in communications technologies made it possible for X-ray technicians to quickly send electronic images of X-ray results to radiologists in other countries for immediate analysis.
The prevalence of nontraded goods has implications for national economies. First, as formerly nontraded goods become tradable, a wider range of a country’s production is organized according to international comparative advantage. A trading country reaps economic benefits from the efficiency improvements that are made possible by this change. In addition, fundamental differences in the nature of traded and nontraded goods have implications for cross-country differences in economic outcomes. According to the hypothesis known as the Balassa-Samuelson effect, the higher rates of productivity growth in traded goods can help explain the cross-country observation that prices are higher in high-income countries than they are in low-income countries.
SEE ALSO Balance of Trade; Trade
Balassa, Bela. 1964. The Purchasing-Power Doctrine: A Reappraisal. Journal of Political Economy 72 (6): 584–596.
Samuelson, Paul A. 1964. Theoretical Notes on Trade Problems. Review of Economics and Statistics 46 (2): 145–154.
Deborah L. Swenson