Question

One of the Principles of economics “Trade Can Make Everyone Better Off.” Based on your understanding of this principle, first, explain the fundamental principles of the trade between the two countries. Today we can see that some countries started to impose some restrictions on the flow of goods and services, do you think these practices contradict the principle? Why?

I need the answer minimum of 500 words please.

Answer 1

International trade deals with the exchange of goods and services between the inhabitants of two countries in order to meet their needs of scarce goods. The fundamental principle of trade is based on the concept of comparative advantage which include two inputs which are labor and capital. Comparative advantage implies producing a good at a lower cost than anyone else. Again, the theory of comparative advantage is based on the concept of opportunity cost. A country which can produce a good at a lower opportunity cost has a comparative advantage in producing that good. A country having a comparative advantage in producing a good specializes in producing that good and exports it in the international market and imports other goods in which the country does not have a comparative advantage. Another fundamental principle of trade is based on the concept of absolute advantage. The theory of absolute advantage is based on one input that is labor and a country have an absolute advantage in producing a good if it can produce the good by using lower quantity of labor. The theory of comparative advantage is an improvement over the theory of absolute advantage.

The principle of economics which states that "Trade Can Make Everyone Better Off " does not always hold. As trade can make some parties better off where as it also makes some party worse off. For example, say a country has a comparative advantage in producing wine. The world price of wine is lower than the domestic price. Now, if the country opens up to trade, consumers in this case are better off as they will be able to buy wine in a lower price compared to that of domestic price but the producers are worse off in this case as they will have to charge a lesser price. Again, if we consider a situation in which the world price is higher than the domestic price. In this case, the consumer are worse off and the producers are better off. Thus, trade does not always make everyone better off. Some parties are better off and some are worse off.

There are also some disadvantages of trade because of which countries practice some restrictions on the flow of goods and services. Countries practice restrictions in the form of tariffs, quotas etc. Sometimes trade leads to the erosion of domestic market which worsens off the domestic producers. Because of trade, domestic goods are being substituted by foreign goods which erodes the domestic markets. Thus in order to save the domestic markets countries practice some restrictions by imposing tariffs or quotas.