Kabir's Econ Blog

September 27, 2009

Two benefits from International Trade

Filed under: Uncategorized — kabir1892 @ 7:52 am

BCO2113

The two basic benefits from international trade are specialization gains and an economical development.

Trades allow an economy to specialize in export so that they can earn revenue to pay for imports for other goods. It increases overall welfare since specialization and trade help countries gain a greater amount of consumption more than they would domestically. This leads to a better standard of living as well. When specialization and production outgrows domestically, there will be lower costs and prices. With prices falling, it will benefit consumers.

Also, people will have access to goods that can’t be produced in that specific country. In terms of political issues, international trade brings trust with countries, and this can help minimize the amount of wars that take place. Finally, an international trade can cause greater competition with firms. With greater competition, domestic productivity will be greater since companies will start producing more of those goods. This will lead to greater quantity and  better quality of products, which will then benefit consumption.

Example: Country A and Country B both produce cotton sweaters and wine. Country A produces 10 sweaters and six bottles of wine a year while Country B produces six sweaters and 10 bottles of wine a year. Both can produce a total of 16 units. However, Country A takes three hours to produce the 10 sweaters and two hours to produce the six bottles of wine, which is a total of five hours. On the other hand, Country B takes one hour to produce 10 sweaters and three hours to produce six bottles of wine which is a total of four hours. 
But these two countries realize that they could produce more by focusing on those products in which they have a comparative advantage. So then, Country A then begins to produce only wine and Country B produces only cotton sweaters. Each country can now create a specialized output of 20 units per year and trade equally for both products. Each country now has access to 20 units of both products. 

This shows an increase in efficiency of international trading.

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