Why Do Countries Trade with Each Other

Topics: Economics, International trade, Comparative advantage Pages: 5 (1527 words) Published: November 25, 2012
Why do countries trade with each other? Show, using examples, why this may be to do with principle of comparative advantage.

In 1776 Adam Smith stated, "If a foreign country can supply us with a commodity cheaper than we ourselves can make it, better buy it of them with some part of the produce of our own industry, employed in a way in which we have some advantage." This sentence shows basic principle on which the world trade is based. Countries buy and sell goods abroad to achieve the best possible cost-effectiveness. Long-distance trade dates back to the ancient times and today it is the heart of the world economy. It is a crucial factor in economic growth of every state. Source of prosperity and development in industrialized world. Statistically speaking, countries with high per capita values of export and import tend to have relatively rich and prosperous societies. International trade is a necessity deriving from the diversity of international community. Countries have different weather, natural resources, population, educational level of workforce, infrastructure. All these thing make cost of producing particular commodities different in each country. And that difference causes international trade to be reasonable. In my essay I’ll try to justify why countries trade with each other by pointing out and explaining particular aspects of foreign trade. Natural Resources and Factor of Endowment

The most obvious and visible cause for international trade is a difference in location of natural resources and factor of endowment. Factor of endowment is amount of labor, land, money and entrepreneurship that could be exploited for manufacturing within a country. Every country is unique, therefore they have different economic potentials. Some countries naturally have more natural resources, higher population, bigger territory than the others. Uneven location of resources causes limited possibilities of production within countries. For example France has basically no oil resources on its own yet it is the world 13th biggest consumer (CIA, 2010). That means that it has to import almost all it requires. They are importing it from countries that have oil surplus that they can exchange. Population is also a crucial factor. More populated nations are more likely to produce huge surplus of commodities that they can subsequently sell. Like China which huge industry sector produce number of goods big enough to sell all over the world. In order to cultivate the land, grow particular plants, practice animal husbandry very specific climate and soil fertility is needed. For instance citrus fruits can develop only in climates with a cool winter. Relatively few countries can claim to have weather like this, yet we can buy oranges and limes all over the world. These examples show that some countries do not have physical possibility to produce certain goods and have to import them. This is especially noticeable in industrialized western societies which historically have very big demand on tropical goods such as spices, fabrics, fruits etc. Specialization

Heckscher-Ohlin theory indicates that countries specializes in the production of goods that it is adopted to produce. It directly derives from differences in factor of endowment I described before. Countries have different production capacity some are rich in capital and poor in labour power, others have a lot of people but not much capital, some have a lot of raw materials, another have skilled man power. Principle of specialization is closely related to the division of labour. Whole country adopts a role of producer of certain good when the others do the same with different goods. Of course it is just a simplification because some commodities like for instance cars are produced in many different countries. One country can be specialized in production of many different goods. But in general every country produce a certain range of products in high volume. That give them the...

Bibliography: Smith, A, An Inquiry into the Nature and Causes of the Wealth of Nations, (1776)
Sokoloff, Engerman, History Lessons: Institutions, Factors Endowments, and Paths of Development in the New World, The Journal of Economic Perspectives, Available from:
[ 1 ]. Smith, A. An Inquiry into the Nature and Causes of the Wealth of Nations. (1776), p. 364.
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