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What Constitutes The Basis For Trade? Also What Are The Gains From Trade In Terms Of Production And Consumption?

963 words - 4 pages

International Trade and Competition

What constitutes the basis for trade? Also what are the gains from trade in terms of production and consumption?

The purpose of this report is to survey what constitutes the basis for trade in an international perspective and to discuss the gains in relation to production and consumption. By examining a range of recently published journal articles, magazine articles and internet sites on the topic of international trade this paper will describes the main basis’s of trade in common use today such as Factor-Endowments and overlapping demand, and will also examine their importance. In relation to the gains of international trade I will investigate a ...view middle of the document...

It is comparative advantage that provides the immediate basis for trade. At this point I will discuss in further detail other sources of the basis for trade.

As explained above the immediate basis for trade stems from the relative product price differences among nations. As a result of the fact that relative prices are determined by supply and demand conditions, such factors as resource endowments, technology, and national income are ultimate determinants of the basis for trade. I will now address the uses factor-endowment as the basis for trade. The factor-endowment theory suggests that the differences in relative factor endowments among nations underlie the basis for trade. The theory asserts that a nation will export that product in the production of which a relatively large amount of its abundant and cheap resource is used. Conversely, it will import commodities in the production of which a relatively scarce and expensive resource is used. The theory also states that with trade, the relative differences in resource prices between nations tend to be eliminated. An example of this would be how South Africa is highly abundant in natural resources and wildlife and culture and therefore focuses its international trade on these resources. This can be compared to China which is highly abundant in labour and therefore focuses its international trade on this resource.

Now I will address the Linder hypothesis of overlapping demand, which explains why some types of nations are most likely to trade with each other. Nations with similar per capita incomes will have overlapping demand structures and will likely consume similar types of manufactured goods. Therefore it can be seen that wealthy nations are more likely to trade with other wealthy nations, and poor nations are more likely to trade with other poor nations. Linder does not rule out all trade in manufactured goods between wealthy and poor nations. For the reason of unequal income distribution...

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