International Trade Exchange

International Trade Exchange

International Trade, exchange (by selling and buying) of goods and services between people in different countries. It is the method of reaping the advantages of division of labour and specialization. Just as it pays the individual members of a community to specialize in the activities in which they have a comparative advantage over others and to use their earnings to buy their services, it also pays nations to specialize. A dentist may also be a first-class dental mechanic but it pays him to specialize in dentistry and to employ a mechanic. Even if the dentist can make dentures better than the mechanic, it pays him to concentrate on dentistry, where his comparative advantage is larger. The mechanic also benefits by concentrating on the task in which his disadvantage is less.

The advantages of international trade are most obvious in trade between countries in tropical and temperate climes. Even though oranges or bananas can be grown in Britain in hothouses, the cost is such that it is more productive to import them from countries with warmer climates and pay for the imports with exports of textiles and bicycles which Britain can produce more cheaply than they can. The advantages are less obvious, but still real, in trade between countries where natural or geographical conditions are more similar. A simple arithmetic example will show that the gains are real. To use real costs rather than simply money prices it is easiest to follow the classical method of assuming that all goods are produced by labour.

Britain is thus more efficient than France in producing each commodity. Fifty blankets will exchange for Too bushels of wheat in Britain and 40 blankets for ´┐Żo bushels of wheat in France before trade begins. Blankets will be twice as dear as bushels of wheat in Britain, but only ij times as dear in France. There will be gain to both countries if Britain exports wheat to France, where it Call be exchanged for more blankets than it would buy in Britain. France gains if it exports blankets to Britain, where they exchange for a larger quantity of wheat than they would buy in France. As long as the exchange rate of blankets against wheat is between one-hail and two-thirds trade will be profitable to both.

The explanation of the gains from trade lies in differences in comparative advantage translated into differences in comparative costs and differences in money prices once the monetary exchange rate between the nations is known. A more fundamental explanation is in terms of what causes the differences in comparative costs. The explanation is that countries differ in their endowments of both natural and acquired resources (e.g. climate and human skills), and they will tend to have a comparative advantage in the production of goods which require mostly resources of which they have a relatively plentiful supply. They will tend to export these goods in return for goods whose production requires resources which are relatively scarce and therefore expensive in their countries.

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