When people say ‘trade’ with others, it simply applies to any business of selling and buying goods through using monetary value to purchase or in some case exchange a good for a good. Trade usually refers to an interaction of two countries, regions or even two shop owners that involves the exchange of goods and services by using ‘free trade’ or monetary value. Place we trade is called a ‘market’. For example, a fruit and vegetable market trades goods such as an apple, etc. Or, trade can refer to a baker who trades money for flour or wheat. However, we do not tend to trade because of the needs of other goods and services that we can not produce. Also, trade helps with increase of GDP, employment, incomes, wider range of choices in products, living standards and decreases inflation. We tend to trade because of the benefits we all can share around that will eventually make both side of trading relationships to gain advantages. This is called the law of comparative advantage. This principle notes that a nation should ‘specialise’ in those select areas of production in which it has the least cost of producing. By doing this, opportunity cost should be maximized, and the gains in international trade maximized. This refers to two countries specializing on certain products that they can produce at minimal opportunity cost and using free trade to exchange certain amount of goods so that both can benefit. For example, let’s assume that there are two countries, Australia and Japan, trading wool and cars. Australia can produce 600 bales of wool while Japan can produce 450 bales of wool, using 100/0 scale. And both countries are capable of producing 900 cars using 100/0 scale.
Wool600 opp cost=3/2cars450 opp cost=2cars
Cars900 opp cost=2/3bales900 opp cost=1/2bales
If used 50/50 scale in using resources:
However, if two countries work out a deal and produce a good that they can produce at least opportunity cost, and then both countries can be satisfied with trade.
Both benefits in amounts of wool since Australia were efficient in producing wool. Australia could produce 600 bales and minus that by (300+225=) 525 which results 75. Then 75 is divided by 2= 32.5 which this number is added to the amount of wool in both Australia and Japan. On the other side, there exists the law of absolute advantage which it refers to a country producing and exporting goods that they produce at a lower opportunity cost in absolute terms. What it means is that a country shall produce and export a certain good or service by not comparing or looking at any better opportunities and trade options. Certainly, there are reasons we trade and it is obvious from above that we trade because we can all benefit in ways we use the law of comparative advantage. Due to specialization and division of labor, most people concentrate on a small aspect of production, trading for other products. Trade exists between regions because different regions have a comparative advantage in the production of some tradable commodity, or because different regions' size allows for the benefits of mass production. Sometimes, we often hear about free trade between two countries, such as US trading beef or veal for other goods from other country. This...