economics 4.1 benefits of international trade

benefit of international trade(firms) (1)

• greater profitability

  • increase in sales revenue - increase potential customers

  • decrease in average cost- increase in output, firms enjoy more EOS(increase output, decrease average cost )

benefit of international trade (consumer) 2

• lower prices

  • firms enjoy EOS - lower product prices

  • household decreases cost of living, increases standards of living

• more choices of goods

  • resources not available / can’t be produced locally

  • resources that are too costly to produce ( cheaper elsewhere, too much opportunity cost)

  • Increase product choices with more different features

benefit of international trade (economy) 2

• improve resource allocation

  • Countries with an absolute advantage in producing a good or service will continue producing them

  • rise in social surplus

benefit of international trade (government) 2

• source of foreign exchange

international specialisation

country focus on producing and exporting the good or service where they have a comparative advantage

absolute advantage

country can produce a good or service using fewer resources than another country.

comparative advantage

country can produce a good or service with a lower opportunity cost than another country.

limitations of comparative advantage

• zero transport cost

• free trade - no trade barriers

• goods and service are homogenous - identical, no branding