Why Do Countries Trade with Each Other
Why do countries trade with each other? Show, using examples, why this may be to do with principle of comparative advantage.
Introduction
In 1776 Adam Smith stated, "If a foreign country can supply us with a commodity cheaper than we ourselves can make it, better buy it of them with some part of the produce of our own industry, employed in a way in which we have some advantage." This sentence shows basic principle on which the world trade is based. Countries buy and sell goods abroad to achieve the best possible cost-effectiveness. Long-distance trade dates back to the ancient times and today it is the heart of the world economy. It is a crucial factor in economic growth of every state. Source of prosperity and development in industrialized world. Statistically speaking, countries with high per capita values of export and import tend to have relatively rich and prosperous societies. International trade is a necessity deriving from the diversity of international community. Countries have different weather, natural resources, population, educational level of workforce, infrastructure. All these thing make cost of producing particular commodities different in each country. And that difference causes international trade to be reasonable. In my essay I’ll try to justify why countries trade with each other by pointing out and explaining particular aspects of foreign trade.
Natural Resources and Factor of Endowment
The most obvious and visible cause for international trade is a difference in location of natural resources and factor of endowment. Factor of endowment is amount of labor, land, money and entrepreneurship that could be exploited for manufacturing within a country. Every country is unique, therefore they have different economic potentials. Some countries naturally have more natural resources, higher population, bigger territory than the others. Uneven location of resources causes limited possibilities of production within countries. For example France
Introduction
In 1776 Adam Smith stated, "If a foreign country can supply us with a commodity cheaper than we ourselves can make it, better buy it of them with some part of the produce of our own industry, employed in a way in which we have some advantage." This sentence shows basic principle on which the world trade is based. Countries buy and sell goods abroad to achieve the best possible cost-effectiveness. Long-distance trade dates back to the ancient times and today it is the heart of the world economy. It is a crucial factor in economic growth of every state. Source of prosperity and development in industrialized world. Statistically speaking, countries with high per capita values of export and import tend to have relatively rich and prosperous societies. International trade is a necessity deriving from the diversity of international community. Countries have different weather, natural resources, population, educational level of workforce, infrastructure. All these thing make cost of producing particular commodities different in each country. And that difference causes international trade to be reasonable. In my essay I’ll try to justify why countries trade with each other by pointing out and explaining particular aspects of foreign trade.
Natural Resources and Factor of Endowment
The most obvious and visible cause for international trade is a difference in location of natural resources and factor of endowment. Factor of endowment is amount of labor, land, money and entrepreneurship that could be exploited for manufacturing within a country. Every country is unique, therefore they have different economic potentials. Some countries naturally have more natural resources, higher population, bigger territory than the others. Uneven location of resources causes limited possibilities of production within countries. For example France
Bibliography: Smith, A, An Inquiry into the Nature and Causes of the Wealth of Nations, (1776) Sokoloff, Engerman, History Lessons: Institutions, Factors Endowments, and Paths of Development in the New World, The Journal of Economic Perspectives, Available from: [ 1 ]. Smith, A. An Inquiry into the Nature and Causes of the Wealth of Nations. (1776), p. 364.