Question

Explain the following statements:

a. International trade is merely an extension of the principal of specialization?

b. International trade between two countries is mutually beneficial even if one of them can produce each commodity more cheaply than other?

Answer 1

a. International trade is merely an extension of the principal of specialization?

Answer: International trade can be stated as an extension of the principle of specialisation or division of labour to the sphere of international exchange. International trade is based on the specialization and it depends upon the factors of production availability. It will increase the domestic cost ratios and thus gains from trade. Specialisation helps in efficient usage of the productive factors with minimum wastages. It also leads to economies of scale and which, in turn, reduces the cost of goods

b. International trade between two countries is mutually beneficial even if one of them can produce each commodity more cheaply than other?

Answer: With free international trade, it is mutually beneficial for two nations to each specialize to produce those goods that it can produce relatively most efficiently and afterwards trade such goods. With this approach, the two nations can increase their combined production, which allows both nations to consume more of both goods. Its validity remains even if a nation can produce both goods more efficiently in absolute terms in comparison to other nation. For instance, if nation 'X' and nation 'Y' both produce cotton and maize, if country X produces cotton more cheaply than Y, it may prove advantageous for nation X to specialize in the production of cotton as it holds comparative advantage in its production