International trade – why it takes place - Business Environment

Trade between countries takes place because resources are unevenly distributed through the world and the mobility of the factors of production is limited, consequently some countries are better at producing certain goods than others. Some countries could not actually produce a particular good: for example, Britain cannot produce minerals that are not indigenous or fruit that can only be grown in tropical weather conditions. If there is a demand for these goods in Britain, there are a number of possibilities: either the British could do without these goods; or an attempt could be made to grow them (in the case of the fruit) despite the climatic conditions; or Britain could buy the goods from other countries that can produce them. In other words it can trade for them.It is easy to see that if country A can produce video cameras more cheaply than country B and B can produce wheat more cheaply than A, specialization should occur and A should produce video cameras and B should produce wheat and they should trade with one another. Complete specialization is, however, unlikely, for strategic reasons. It is also true that even if country A can produce both goods more cheaply than country B there is scope for benefits from trade. As this may not be so easy to imagine, Table gives a numerical example. Country A can produce 100 video cameras or 100 units of wheat using 100 workers. Country B can produce 20 video cameras or 40 units of wheat with the same number of workers. Country A can therefore produce both goods at lower cost than country B. To show that even in this situation trade will benefit the world, assume that both countries produce both goods and that they each devote half of their workforce to each good.
The total output of video cameras is 60 units and of wheat is 70 units. Country A is 5 times more efficient at producing video cameras than country B, but only 2.5 times more efficient than B in producing wheat. It would therefore benefit both countries if production was rearranged. If B specialized completely in wheat and A produced 35 units of wheat and 65 video cameras, world output would be as indicated in Table.
In short, world output has been increased and everyone is better off provided that trade takes place. This simplified example illustrates the basic argument forfree trade. Free trade brings the advantages of higher world output and higher standards of living. Countries will produce the goods in which they have a cost advantage and trade with other countries for other goods. So countries can buy goods at lower prices than they could be produced for at home. Where economies of scale are present, the savings as a result of specialization can be immense.

Production-of-video cameras and wheat

Theoretically, free trade brings most benefit; however, there are often restrictions to such trade and it is unlikely that complete specialization will take place. Most countries would regard being totally dependent on another country for a particular good as a risky proposition.


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