Importance of International Trade Theory on International Trade

Importance of International Trade Theory on International Trade

Importance of International Trade Theory on International Trade

International trade contributes a significant portion for a nations total GOP. Business organizations get a high level of privilege during operating in the international market. In economics, the principle of absolute advantage refers to the ability of a party (an individual or firm, or country) to produce a greater quantity of a good, product, or service than competitors, using the same amount of resources. International trade between different countries is an important factor in raising living standards, providing employment and enabling consumers to enjoy a greater variety of goods.

The following reason will clarify the significance of trade for both business organization and a country.

(1) Profit for an expanded market – Business organizations can increase their production by expanding their sales in the international market. With a large scale of production, the companies can enjoy the economies of scale that result in a larger volume of profit.

(2) Luck or surplus of natural resources – Natural resources are not evenly distributed among the countries. To enjoy the benefits of unavailable resources companies engaged in international business.

(3) Lower production cost – Costs of factors of production vary from country to country. It provides the opportunity for the business organization to take this advantage. The business also exploits the economies of scale by operating the wide market.

(4) Presence of national talent and tradition – The feature gives a national competitive advantage over others. Due to this, nations can control the international market.

(5) Make use of abundant raw materials: Some countries are naturally abundant in raw materials – oil (Qatar), metals, fish (Iceland), Congo (diamonds) Butter (New Zealand). Without trade, these countries would not benefit from the natural endowments of raw materials.

(6) It widens the extent of the market: Every country makes an attempt to produce different goods in large quantity. This induces production on a large scale and thereby generates economies of scale.