Benefits of Trade

Benefits of trade (9)

- availability of goods and services

- increased competition

- productive efficiency

- allocative efficiency

- learning

- access to markets

- economies of scale

- production costs

- source of foreign exchange

benefits of trade: availability of goods and services

- consumers and businesses can access goods/ services that cant be produced domestically

benefits of trade: increased competition

- markets have become more competitive as businesses from different countries enter markets

- benefits consumers: market competition = lower prices + greater choice of goods/ services

benefits of trade: productive efficiency

- foreign competition in domestic markets means domestic producers strive to be more productively efficient = produce at lowest possible cost

benefits of trade: allocative efficiency

- a domestic country no longer has to be producing goods which have a high cost of production because they can import from another country which has lower costs of production for those goods, instead domestic country can focus on producing goods it is efficient at producing

benefits of trade: learning

- domestic firms can learn from production techniques of foreign competitors = increasing efficiency

benefits of trade: access to markets

- export markets offer firms huge increase in potential revenues compared to selling only in their domestic markets

benefits of trade: economies of scale

- by exporting to intl market, firms face greater demand so they can achieve economies of scale when increasing production = cost per unit falls

benefits of trade: production costs

- access to imported inputs/ raw materials at a lower cost = lower production costs

benefits of trade: source of foreign exchange

e.g. by selling exports to US, developing country earns US $ which it can use to buy imported capital from the US = long-term growth

The theory of specialisation

- explains gains countries get from specialisation in intl trade

Absolute advantage

Comparative advantage

Absolute advantage

when one country is more productively efficient (with the same quantity of FoPs it can produce more of the good than another country) at producing a good than another country

- one country produces more units of good x and the other country produces more units of good y

Absolute advantage - example: Country X: 20 lemons or 5 wheat, Country Y: 4 lemons or 10 wheat - draw table and PPC

Comparative advantage

- one country has a lower opportunity cost of producing a good than another country

- however there are still efficiency benefits from trade because the countries have different opportunity costs of producing the two goods

ie. one country can produce more of good x and of good y but it will still trade with the other country because there is an opportunity cost if it is producing x instead of just y

Weaknesses of the model

- specialisation is more complex than the two-industry, two-country model

- model assumes zero transport costs

- gains from specialisation are constantly changing

- as specialisation occurs in a country and an industry grows, productive efficiency may improve as the industry benefits from economies of scale

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