Question

1. What are some of the reasons that cause trade (Refer to chapter 2 and lectures 1-2)? What is the concept that drives trade for each of these motives?

Please show all work

Answer 1

Solution

Some reasons for trade are as follows:

1. The technological difference or comparative advantage: Different entities use various technologies in producing goods and services because of which productivity and output level differ and the firm gets a comparative advantage over another. Therefore, a trade occurs at a point where one firm has a comparative advantage in producing goods and services from other firms.

2. Resources: Firms produce goods and services from the resources they have and trade them. For example, gulf countries trade majorly in oil.

3. Demand: Gulf countries trade in oil because there is a demand for oil in other countries. Similarly, a trade occurs in other various products such as merchandise, sports equipment, etc. because of their demand.

4. Production scale: Giant companies produce goods and services at comparatively low cost and also sell at the prices which are comparatively lower. If the same goods and services are produced on a smaller scale they would cost high and thereby charge higher prices. Therefore, it is better to trade rather than producing on their own.

The concept of arbitrage or price difference drives the trade for each of these motives. Because of different prices buying and selling of goods and services enables trade partners to get benefitted comparatively.