Justification of International Trade (21 Jan 2011)


In the main, countries specialize in producing goods and services that they have advantage in. When countries specialize, they would produce more than what is needed and export the excess to other countries. The revenue obtained from these exports would be used to purchase other goods and services that are not adequately produced in at home. Countries trade for the following reason:

a. Difference in countries resources endows them with natural advantage for trade:

i. Natural Resources: e.g. Oil (Saudi Arabia); Diamonds (South Africa)
ii. Labour Resource: Labour (China, India)
iii. Capital Stock: Excess of high tech capital stock e.g. Machinery (Germany/ Japan); military hardware (USA).

b. Differences in Taste and Preferences: Countries trade with each other when they have dissimilar tastes and preferences. The case study of the global appeal for Apple products is a classic example of this point.

c. Differences in the relative cost of production: The global supply chain in the production of the iPod is a case study explain the rationale for trade amongst Japan, Taiwan, Korea and China is to exploit the cheaper cost of production.