Why do countries trade with each other
„Why do countries trade with each other? Show, using examples, why this may be to do with the principle of comparative advantage.”
In the modern world, there is no country that can produce as much as is needed. Countries trade with each other to obtain products and services, which they do not have or are unable to produce. Some goods may be unobtainable for certain countries, but a lot of things which could be produced are nevertheless imported. Why is it so? Why is it that the country doesn’t want to become self-sufficient and be independent?
The motives for taking such actions were described by the English economist David Ricardo - one of the creators of the modern theory of international trade in his book Principles of Political Economy in the XIX century. He examined the exchange between Portugal and United Kingdom. The United Kingdom exported large quantities of cloth to Portugal whilst importing wine. Both countries were capable of producing each of these goods. So why is that an exchange didn't take place in the opposite direction if Portugal was also able to produce and export cloth to the UK? Ricardo began his analysis by determining the productivity of labour in each country in the production of both goods. He raised the issue of „comparative advantage”.
The way in which a country can achieve the benefits of international trade can be explained by the assumption that there are only two countries and each of them can produce only two types of goods - cars and washing machines. It is the best idea to clarify the concept of comparative advantage. We can assume for simplicity, that both countries have 2,000 employees. If they would not trade, half of the workforce is employed in the cars industry and the other half in the washing machines industry. Building a car in country A, requires 2 employees, while country B needs 4. The cost of production of the washing machine, shown by the number of employees that the country needs to hire, are respectively 1 and
In the modern world, there is no country that can produce as much as is needed. Countries trade with each other to obtain products and services, which they do not have or are unable to produce. Some goods may be unobtainable for certain countries, but a lot of things which could be produced are nevertheless imported. Why is it so? Why is it that the country doesn’t want to become self-sufficient and be independent?
The motives for taking such actions were described by the English economist David Ricardo - one of the creators of the modern theory of international trade in his book Principles of Political Economy in the XIX century. He examined the exchange between Portugal and United Kingdom. The United Kingdom exported large quantities of cloth to Portugal whilst importing wine. Both countries were capable of producing each of these goods. So why is that an exchange didn't take place in the opposite direction if Portugal was also able to produce and export cloth to the UK? Ricardo began his analysis by determining the productivity of labour in each country in the production of both goods. He raised the issue of „comparative advantage”.
The way in which a country can achieve the benefits of international trade can be explained by the assumption that there are only two countries and each of them can produce only two types of goods - cars and washing machines. It is the best idea to clarify the concept of comparative advantage. We can assume for simplicity, that both countries have 2,000 employees. If they would not trade, half of the workforce is employed in the cars industry and the other half in the washing machines industry. Building a car in country A, requires 2 employees, while country B needs 4. The cost of production of the washing machine, shown by the number of employees that the country needs to hire, are respectively 1 and