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:fire:Why do countries trade?:fire: (More efficient allocation of…
:fire:
Why do countries trade?:fire:
The gains from international trade
Lower prices
Ability to buy g&s at a lower prices than the domestic ones
-less expensive products -less expensive raw materials & semi-manufactured goods
Why lower prices?
access to natural resources
differences in quality in labour forces
differences in quality in capital
differences in level of technology
concept in comparative advantages
Greater Choice
in terms of products
from a number of different countries
Differences in resources
Different countries possess different resources
there are some resources that a country may need, but does not have
Ex: copper, diamond, natural oil
need them to produce products
have no choice but to import them
need to export g&s to earn foreign currency, and so buy the required products
Economies of scale
increase production, demand increase, size of market increase
level & size of production will increase too
larger production
amount of specialization increase in large firms
more knowledgeable and more efficient
greater scope for the division of labour
more efficient for workers
acquiring experience and expertise
country's export industries become more efficient in the long run
producers more competitive
reduction in long-run average costs
Increased competition
domestic firms compete with foreign firms
lead to greater efficiency
consumers gain by being offered cheaper g&s
quality and variety of g&s increases
More efficient allocation of resources
production happens at the lowest cost
countries will take advantage of their efficiency, without government intervention
means that world's resources are being used most efficiently when free trade is taking place
Source of foreign exchange
enable countries to obtain foreign exchange
essentially important for countries which don't have a convertible currency (ex: Ghana)
so that countries can use them to purchase g&s from other countries