International trade
International trade - exchange of goods and services among different countries. That involves sale of exports and imports.
Factor endowment- refers to quantity and quality of factors of production that particular country have. Some countries have greater amount of natural resources or human capital that brings them an cost advantage in production of products using these resources.
Free trade - refers to no barriers to trade among different countries.
EXAMPLES:
Ghana - chocolate
Saudi Arabia and Kuwait - oil supply
Vietnam - climat for growing crops such as rice
South Africa - 2/3 of world’s platinium
Chile - one of the biggest exporter of fruits in the world
China’s Lenovo one of the largest producer of laptops
Iran - crude oil
Azerbaijan has oil, Zimbabwe has fertile soil and Singapore has highly-skilled labour. Trade allows countries to have access to resources that are essential for production. Japan is only able to produce steel because it can import iron ore from Australia. South Korea can produce Samsung phones only because it can import oil from the Middle East.
}}Economies of scale are the cost advantages that enterprises obtain due to size, output, or scale of operation, with cost per unit of output generally decreasing with increasing scale as fixed costs are spread out over more units of output.}}
Benefits of the free international trade:
- increased competition - international trade create greater competition among domestic companies and foregin firms. Sometimes foregin firms offer a greater variety of goods and services that incentive domestic buyers. That encounter local producers to add special features to their goods and services to increased their competition.
- lower prices - due to larger competition domestic and international firms lower their prices in order to increase their attractivness. Also domestic business sometimes buys raw materials from foregin firms in order to lower their cost of production, because some import materials are cheaper than local ones.
- greater choice - consumers have greater choice because they can buy products from local companies and also from foregin ones. That enlarge the market with greater variety of products.
- acquisition of resources - some countries have smaller quantity of natural resources or human capital (factors endowment). That is why international trade enable them to purchase resources that are not avaliable in the particular country.
- foreign exchange earnings - Foreign exchange earnings refer to the financial gain made by selling goods and services or by exchanging currencies in global markets. Trade provides countries, such as emerging economies, with the opportunity to access hard currencies For example, Zimbabwe has experienced hyperinflation, which has significantly depreciated the Zimbabwean dollar. As the Zimbabwean dollar loses value, no one outside of Zimbabwe will want to hold Zimbabwean dollars. This means that it is essential to have a stock of hard currencies, such as the USD, available to pay for transactions for international trade.
- acces to larger markets - larger consumer base due to larger access to foregin markets. When firms increase their production so as export of their resources they create larger consumer base and increase their revenue (economies of scale).
- economies of scale
- efficient resource allocation - removing of trade barriers encourage the efficient resource allocation due to less restrictive rules that would decrease the efficienty of the trade. Some firms due to this agreement can improve the quality of their production by obtaining the products that are unavaliable in their country.
- efficient production - international trade enables firms to more efficient production. It incentives them to compete with each other with price and non-price factors (such as quality). This encourage firms to obtain more goods from foregin countries in order to expad their production and improve their quality and also lower the cost of production. This make the efficient resource allocation. Firms that are unefficient they are not important in the market and lose consumers.
Comperative advantage - when country can produce some goods at given amount of output, at lower oppurtinity cost than another country.
Sources of comparative advantage:
-factors endowment refers to quality and quantity of factors of production that some country have. Countries well endowment gain a comperative and cost advantage.
-level of technology
-investments in research and development ability to invest in R&D give country a competitive advantage.
-price stability inability to stabilize the prices can damage the comparitive cost advantage of a country.
-exchange rate fluctuations changes in the exchange rate affects the relative price of exports and imports.