What Constitutes the Basis for Trade?

The purpose of this report is to survey what constitutes the basis for trade in an international perspective and to discuss the gains in relation to production and consumption. By examining a range of recently published journal articles, magazine articles and internet sites on the topic of international trade this paper will describes the main basis’s of trade in common use today such as Factor-Endowments and overlapping demand, and will also examine their importance. In relation to the gains of international trade I will investigate a number of gains in relation to consumption and production. This paper will focus on international trade, which can be defined as the exchange of goods and services between nations. This type of trade gives rise to a world economy, in which prices, or supply and demand, are affected by global events.

A basic question in the study of international economics is 'why do nations trade?' or in other words, 'what is the basis of international trade?' The basis of all economic activities, including international trade, is essentially the human desire to improve its standards of living, i.e., to consume more and more of superior goods and services. It is this desire that creates a process of trade be¬tween the nations. Firstly you must look at the immediate basis for trade which is stemmed from the cost differences between nations, which is their natural and acquired advantages. Comparative advantage occurs when one nation can produce a good or service at a lower opportunity cost than another. This means nations can produce a good relatively cheaper than other nations. It is this theory that states that if nations specialise in producing goods where they have a lower opportunity cost - then there may be an increase in economic welfare of the nation. It is comparative advantage that provides the immediate basis for trade. At this point I will discuss in further detail other sources of the basis for trade.

As explained above the immediate basis for trade stems from the relative product price differences among nations. As a result of the fact that relative prices are determined by supply and demand conditions, such factors as resource endowments, technology, and national income are ultimate determinants of the basis for trade. I will now address the uses factor-endowment as the basis for trade. The factor-endowment theory suggests that the differences in relative factor endowments among nations underlie the basis for trade. The theory asserts that a nation will export that product in the production of which a relatively large amount of its abundant and cheap resource is used. Conversely, it will import commodities in the production of which a relatively scarce and expensive resource is used. The theory also states that with trade, the relative differences in resource prices between nations tend to be eliminated. An example