Why do Countries trade?
- Countries trade because most countries specialize in producing only a few goods, and no country can make all the goods and services that are required to sustain it globally. Therefore, countries trade with each other to obtain goods and services they don’t specialize in, whilst also giving away goods and services that they do specialize in, making profits for the business’s involved and increasing the standard of living in the country, as more people make profits through international trade and so become richer.
- They also trade with other countries to increase competition in the countries market. When you open your country to international trade, all the companies inside the country immediately have increased competition from foreign companies and foreign technology, which means that they will have to increase efficiency, make better products or lower prices to maintain there competitive edge in the market. These changes benefit the consumers as a whole, as they have access to better products and lower prices.
Important Words to Know
International Trade : Any trade that happens between 2 different countries
Trade Deficit : When one country has more goods imported than it does exported, meaning more money is being spent on foreign goods
Free Trade : This is when businessmen can trade between countries without any interference from the governments with respect to tariffs and laws
Protectionism : This is when a country imposes tariffs and trade barriers to other countries, in the form of high custom tax or high importing tax, to reduce the competitiveness of the foreign firms and thus protect their own companies from foreign competition to an extent
Comparative Advantage : When one country is comparatively superior in the production of one type of good then another country, meaning the cost of production is lower and the process is more efficient. For example, the Japanesehave a comparative advantage in the production of cars when compared to the UK, as they have more efficient production methods and can produce it for cheaper, keeping cost of production down. Therefore, they can sell the same product for cheaper then a British car company could.
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