Principles of Business Note #34

International Trade
International trade consists of exports and imports between countries, which should cause an
improvement in people’s living standards through the principle of comparative advantage.
Comparative advantage is the idea that countries benefit from specializing in the production of
goods at which they are said to be more efficient.
It is an advantage for countries to be self-sufficient, but there are reasons why trade must take
place between nations.
Absolute Advantage
The capability to produce more of a given product using less of a given resource than a
competing entity.

For example, consider again Country A and Country B. The opportunity cost of producing 1 unit
of clothing is 2 units of food in Country A, but only 0.5 units of food in Country B. Since the
opportunity cost of producing clothing is lower in Country B than in Country A, Country B has a
comparative advantage in clothing.
Thus, even though Country A has an absolute advantage in both food and clothes, it will
specialize in food while Country B specializes clothing. The countries will then trade, and each
will gain.
Absolute advantage is important, but comparative advantage is what determines what a country
will specialize in.

Reasons for International Trade

● Lack of certain natural resources to produce essential goods. Oil which is important to
economic life must be imported into countries that do not possess that natural resource.
Principles of Business Note #34

● Lack of capital, technology and specialist labour to manufacture certain goods on a large
scale. For example, Caribbean countries import machinery equipment and vehicle.
● Differences in climatic conditions, e.g. many tropical countries import grapes and
strawberries as these produce need cool climates to survive.
● Differences in the cost of production between countries.  This reason is based on the
principle of comparative advantage which states that benefits will be gained from trade if
countries produce goods in which they have a relative advantage.  Therefore, if two countries
both produce cars and coffee but each is more efficient at producing or produces either at a
lower opportunity cost either car or coffee, then trade can take place. The country that is
more efficient at producing coffee should put all its resources into coffee and import cars
from the other country that is efficient in producing cars.
● To earn foreign exchange to pay for imports.
● Promotes necessary political connections between countries

Advantages of Int. Trade Disadvantages of Int. Trade

● Increase utilization of productive ● Protection required by local firms

capacity for export
● Increased employment for increased ● Dumping of goods by developed
output countries
● Improved standard of living due to ● Underdeveloped local industries
increased variety of goods
● Increased quality of goods due to
competition

REGIONAL AND GLOBAL BUSINESS ENVIRONMENT

Stages of Economic Integration

Principles of Business Note #34

1. Preferential trading area – a free trade area or trading bloc giving preferential access to
goods from different countries eg. Tariffs
2. Free trade area – a group of countries eliminate barriers between each other eg. Tariffs
and quotas and may have different policies with members outside the area eg. increased
tariffs.
3. Customs Union- free trade area with a common external tariff for non-members.
4. Common Market- a Customs Union with agreeing to adhere to the same product
regulations and freedom of movement of the factors of production. This is also called the
single market when licences, entry permits and taxes have been removed from trading.
5. Economic Monetary Union – a Single Market with a common currency.
6. Complete Economic Integration- final stage of economic integration; complete merging
of policy making with group decisions made on matters concerning all member countries.