Why do countries engage in international trade?

International trade—business conducted across national borders—drives GDP and directly and indirectly affects global alliances, globalization, and the economic health of nations.

All countries, regardless of size, engage in trade because no single country can produce all the goods and services its citizenry requires. Countries attempt to produce goods with a low opportunity cost and trade them with other countries for goods that they cannot produce domestically or find expensive to produce.

In 1995, the World Trade Organization was formed to help supervise and regulate international trade. As of 2017, there are 164 member states in the WTO.

Absolute and comparative advantages play an important role in determining the nature of trade between specific countries. When a country can produce more of a specific good with the same resources as compared to another country, it is said to have an absolute advantage. In the same way, a specific country is said to have a comparative advantage if it is able to produce goods at a relatively lower cost than other countries can.

Countries engage in trade because it allows them to acquire resources that they do not have, sell resources that they have in abundance, increase income and protect multinational corporations. They are also able to reach new markets and improve relationships with other countries, which may prove vital in times of international crisis.

Reasons for International Trade -

Different factor endowments – some economies are rich in natural resources while others have relatively little. Trade enables economies to specialize in the export of some resources and earn revenue to pay for imports of other goods.

Increased welfare – specialization (where countries have a comparative advantage – see the next section for more detail on this) and trade allow countries to gain a higher level of consumption than they would do domestically and this leads to increased welfare and higher living standards.

To gain economies of scale – with specialisation and production on a larger scale than may be possible domestically, a country may be able to gain more economies of scale. This will lead to lower average costs and benefit consumers through lower prices.

Diversity of choice – trade enables us to access goods and services that we may not be able to produce ourselves. What would be an example in your country ofgoods that you can only get through trade?

Political / historical reasons – some trade takes place for political and other reasons relating to history and tradition, though this is generally diminishing in importance.