Basic of International Trade

A country specializes in a specific commodity due to mobility, productivity, and other endowments of economic resources. This stimulates a country to go for international trade. The basis of international trade lies in the diversity of economic resources in different countries. All countries are endowed by nature with the same production facilities.

There are differences in climatic conditions and geological deposits as also in the supply of labor and capital. These differences provide a country an opportunity to specialize in the production of some specific commodities. Such specialization is facilitated by the exchange of surplus production through international trade.

International trade takes place when buyers find foreign markets cheaper to buy in and sellers find them more profitable to dispose of their products than the domestic market. Thus, more effective use of the world’s resources is made possible through international trade.

Economists cite Ricardo’s theory of Comparative Advantage as the first principle of international trade. This theory demonstrates that it benefits all countries to be involved in international trade, even if they do not have an absolute advantage. Ricardo demonstrated that countries benefit from specializing in those areas where they offer the greatest relative (or comparative) advantage. Thus, all countries can benefit from international trade, especially with the subsequent “knock-on” effects of this activity.

The four factors are:

1. Factor conditions

The factors of production- land, labor, enterprise, and capital- all potentially contribute to the development of competitive advantage. Many Gulf nations are rich in oil and gas resources; South Africa is rich in diamond mines. Developed nations such as Switzerland and Germany have well-educated labor markets, whereas other nations, such as Sudan, Haiti, and Benin have low levels of literacy.

2. Demand conditions

Porter’s model states that strong local demand creates benefits based on a better understanding of market needs. Proximity to the market facilitates this dialogue.

3. Firms, strategy, structure, and rivalry

High levels of local competition encourage competitive companies to improve, and the resulting strong competition in home markets provides a base for exploiting strengths internationally.

4. Related and supporting industries

Successful national industries normally attract good local suppliers, which in turn increases the competitiveness of this industry in international markets. Competitive advantage, once established, can be sustained and developed by improvements in each of these areas. For example, national governments may support training initiatives or allow tax incentives or grants to encourage or aid supporting industries to further develop the national advantage.

International Trade Between Nations

International trade between nations is a very important part of an economy. For the most part, international trade is beneficial between two nations that have strong markets in two different sectors.

A country with a strong market in one sector has a comparative advantage over another nation because of lower opportunity costs. This opportunity cost translates into gains from trade because of the resulting net savings by a nation on manufacturing goods. By importing goods, a nation does not have to spend time, money, or resources developing sectors of an economy, which it does not necessarily need.

International trade becomes an attractive option when gains from trade are taken into account. When a nation produces a certain good, such as automobiles, the product can be exported to another nation for goods and services in return.

The exchange of these goods usually results in lower local product costs and increased volume worldwide. If one car is worth 500 barrels of oil and the opportunity cost to extract 500 barrels of oil in the US is roughly 1.5 cars then it is an obvious advantage to import the oil and export automobiles. This is common among industries.