Specialisation and international trade increases real incomes and results in lower prices – obviously, a very major gain from trade. Specialisation enables each good and service to be produced at the lowest average cost which, again, increases profits and/or decreases prices to consumers in competitive markets. Thus productivity increases, and less inputs are required to produce the same quantities of goods and services, and/or more goods and services can be produced with the same quantities of inputs. Combined with international treading, such specialisation maximises the global output of goods and services from any given amount of resources. International trade enables countries to produce more specialised goods and services and export surpluses to the rest of the world. With international trade countries can specialise in producing those goods and services they can produce the most efficiently with the resources they have (e.g., cars in Japan and wine in France). These lower costs add to the profitability of firms and increase worldwide supply, at the same time prices charged to consumers decrease and demand increases. Employing such highly specialised and expensive capital resources does not make financial sense on smaller scales, and it is only when goods and services can be produced in quantities sufficient to lower the average total cost of each product, that such investments by firms begin to make financial sense. The sophisticated and capital intensive robotics employed in Japanese car manufacturing would be a classic example of such production technologies. With such a mass market, production can be expanded and highly efficient technology can be employed in mass production lines. International trade increases consumer welfare as wants are better able to be satisfied.Įconomies of scale can be reaped as a global mass market is opened up to firms and industries that export goods and services. These are goods and services that would not be consumed if countries did not trade with each other. Consumers can purchase a wide variety of imported goods and services from almost any country in the world. These exported goods and services then enable South Korea to earn foreign exchange which it requires to purchase the necessary raw materials to use in its manufacturing industries – a virtuous circle.Ĭonsumer choice increases with international trade. It imports raw materials and specialises in using its factors of production into sophisticated electronics and consumer goods which it then exports to the rest of the world. South Korea has very limited natural resources. The UK excels in the production of financial services (e.g., banking, share broking and insurance) as the UK’s factors of production are better suited to this specialty. Thus, France specialises in the production of wine because the land, climate, technical knowledge and skilled labour results in more productive use of France’s factors of production. For example, wine can, and is, made in the UK but wine made in the UK is comparatively less efficient (lower productivity), higher unit costs and the product is generally of lower quality than wine made in France. Not all countries will have important raw materials or resources such as copper (Peru and Chile) and iron ore (Australia and Canada) necessary for manufacturing other goods such as steel and electronics.Ĭounties may be able to produce goods and services, but do so less well than other countries. ![]() For example, some foods such as cocoa for chocolate can only be grown in equatorial climates, and others such as cod can only be found in chilly subarctic waters such as that off the coast of Iceland or Canada. ![]() This holds true for many other goods and services. ![]() As these countries require oil and gas, they must purchase it from the oil producing countries. Countries such as Saudi Arabia, the US and Russia have vast oil and gas resources, other countries such South Korea, Germany and Turkey have virtually no proven oil reserves. International trade enables the producers and consumers of different countries to purchase goods, services and resources they do not have or do not have in sufficient quantities.
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