Question

Consider a product with a perfectly competitive market. Carefully explain why nations gain from engaging in international trade in this product. Do nations gain equally from trade? If not, what determines which country gains more? (In your answer you can assume a two-country world

Answer 1

A country should certainly gain by trading with other nation. Just as a tailor does not make his own shoes but exchange a suit for shoes and hence both the tailor and shoe-maker gain by trading. in a same manner a country as a whole would gain by having trade relation with other countries.

If one country has absolute advantage over another line of production and the other country has absolute advantage over first country line of production then both countries would gain by trading.

For Example - If it takes 10 unites of labour to produce one unite of good X in country A. but 20 unites of labour to produce the same good in country B and if it takes 20 unites of labour to produce one unite of good Y in country B and 10 unites of labour to produce the same good in country A, then both the country will gain by trading. After the opening of trade, Country A will specialise in the production of good X, while country B will specialise in the production of Y.  

Also certain countries have the monopoly of certain minerals e.g Bangla Desh for Jute production. Hence International trade also make the availability of scares product for other country over one country.

Lets see in example how nation gain with international trade:

Country	Cotton (bales)	Wheat (bushels)
Portugal	10	25
England	15	10

In the above example its clear that in country Portgual certain amount of labour is able to produce "10" bales of cotton, where as country England is producing "15" bales of cotton. On the other hand Portugal is producing "25" bushels of Wheat and country England is producing "10" bushels of wheat. Its clear from the above example that country Portugal is superior Or efficient in producing wheat (25>10), where as Country England is efficient in producing cotton (15>10). Hence country Portugal is specialise in production of wheat and export it to England on the other hand country England is specialised in the production of cotton and export to Portugal. Both the countries gain. However which country gain more in this trade will get impacted by the certain principles:

1 . Products differ in factor requirement.

2 . Countries differ in factor endowments. ( USA is rich in capital. so capital is cheaper there)

3. The Immediate cause of international trade is the differences in relative commodity prices in the two regions.

4. Differences in factor prices are caused by differences in factor endowments and their relative scarcities in two nations.

5. When rate of exchange is establised, relative prices differences are translated into absolute price differences.

6. Since factor of production are immobile between two countries free mobility of commodities in international trade can serve as partial substitute for factor mobility.

7. Transportation cost.

8. Different proportions of various factors required for producing different goods.