31. International trade.

SPECIALIZATION AMONG NATIONS

“The wealth of all nations arises from the

labour and industry of all people”

(Charles D’ Arenant, 1656-1714)

International trade is essential for the maintenance and growth of prosperity in all countries.

One of the major reasons why international trade takes place is that of economic advantage. International trade creates value. It increases the efficiency of resource allocation worldwide, reduces production costs and through the international division of labour lower prices paid by consumers and increases product variety and availability.

Nations are usually better off if they specialize in certain products or commercial activities. By doing what they do best they are able to exchange products not needed domestically for foreign-made goods that are needed. This allows a higher standard of living than would be possible if the country tried to produce everything itself.

The concepts of absolute advantage and comparative advantage play a critical role in international trade.

A country has an absolute advantage in a marketing of a product if it has a monopolistic position or if it produces the item at the lower cost. Examples of absolute advantage are rare, because few countries are sole suppliers and because economic conditions rapidly alter production costs.

A practical approach to economic specialization is that of comparative advantage. A country has a comparative advantage in an item if it can supply that item more efficiently and at a lower costs and it can supply other products. Nations usually produce and export those goods in which they have the greatest comparative advantage and the least comparative disadvantage. Countries tend to import those items in which they have the least comparative advantage or the greatest comparative disadvantage.

For example, American exports tend to be those in which the US has a comparative advantage over its trading partners. Being a highly industrialized nation with good natural and agricultural resources, the US tends to export manufactured items (aircraft parts), food products (grain, wheat), and some natural resources (coal). By contrast, countries with low cost of labour often specialize in products that require a significant amount of labour, such as shoes and clothing.

Some countries refuse to specialize their productive efforts because they want to be self-sufficient. Other countries subscribe to self-sufficiency viewpoint only for commodities they regard to be strategic to their long-run development.

In most cases those who seek to be self-sufficient do so for reasons of military preparedness, fear of economic reprisal from other countries and nationalism. They see non-economic advantages as being more important to the national welfare than the economic advantages of specialization. Israel and South Africa are examples of countries that seek to be self-sufficient.

Comprehension:

1. Why is international trade essential?

2. When are nations usually better off?

3. When does a country have an absolute advantage in marketing of a product?

4. What does comparative advantage mean?

5. Why do some countries refuse to specialize their productive forces?

6. Will you give some examples of countries that have a comparative advantage over their partners?

7. Name some countries that seek to be self-sufficient.

Text organization.

The statements below express the main ideas of the text. Number them so that they are in the same order as the ideas in the text. The first one is given for you: