Fundamental Reasons of International Trade

Introduction

International trade has become increasingly relevant in the present era of globalization. This essay discusses the fundamental reasons for international trade. There are six fundamental reasons for international trade, which are discussed in detail below.

Fundamental reasons of international trade

Opportunity Cost

Due to the scarcity of resources in a country for the production of all goods, countries trade with each other (   Krugman, 1994  ). Thus, the resources which a country has to sacrifice namely opportunity cost, for producing a product is a main determinant factor of the production of the goods and services by the country for international trade.

Comparative Advantage

The second reason for trade between different countries is the ability for a given product’s production of a country at an opportunity cost which is comparatively lower than the other countries. This comparative advantage of a country for particular items can be another reason for international trade.

Absolute Advantage

The third reason for trade between different countries is the ability of a country for the production of goods with resources, which are limited, when compared with other countries. Absolute advantage can occur in the case of a country being the item’s only producer and also in the case of   a nation’s ability for producing   items cheaper than other nations. This results in the trade of different items between different countries .

This video provides some further explanation about international trade.

Competition

The  fourth reason for international trade is the  facilitation for competition between different countries  in terms of foreign and local goods.

Access to Capital

The trade between different countries helps poor countries to access capital from rich countries through borrowing or the attraction of foreign direct investment in these countries (Gandolfo, 1998 ). Thus, the poor countries will have access to the capital, which is imported or the benefits of transfer of technology. Moreover, by the direct investment abroad, these countries get more benefits due to the higher yields of the technological transfer abroad compared to the domestic investment.  Thus, the differences in the availability of capital between countries are considered as a fundamental reason for international trade.

Economic and Social Development

 The economic and social development of the developing countries is supported through international trade. Thus, the differences in the economic and social development of different countries are considered as another fundamental reason for international trade.

Along with the above mentioned reasons, there are other reasons for international trade namely   taste differences, industrial development differences, technological differences and the investment climate differences between different countries (Gandolfo, 1998 ).

References

Gandolfo,G(1998) : International Trade Theory and Policy, Germany: Springer.

Krugman,P R (1994) :  Rethinking International Trade,  Cambridge: MIT Press.