paper 2.docx

Why do countries trade? Countries trade with each other when, on their own, they do not have the resources, or capacity to satisfy their own needs and wants. By developing and exploiting their domestic scarce resources, countries can produce a surplus, and trade this for the resources they need. Cl...

Why do countries trade? Countries trade with each other when, on their own, they do not have the resources, or capacity to satisfy their own needs and wants. By developing and exploiting their domestic scarce resources, countries can produce a surplus, and trade this for the resources they need. Clear evidence of trading over long distances dates back at least 9,000 years, though long-distance trade probably goes back much further to the domestication of pack animals and the invention of ships. Today, international trade is at the least of the global economy and is responsible for much of the development and prosperity of the modern industrialized world. Goods and services are likely to be imported from abroad for several reasons. Imports may be cheaper, or of better quality. They may also be more easily available or simply more appealing than locally produced goods. In many instances, no local alternatives cost and importing is essential. This is highlighted today in the case of Japan, which has no oil reserves of its own, yet it is the world\'s fourth largest consumer of oil, and must import all it requires. The production of goods and services in countries that need to trade is based on two fundamental principles, first analyzed by Adam Smith in the late 18^th^ (in The Western of Nations, 1776), these being the **DIVISION OF LABOR AND SPECIALIZATION**. **DIVISION OF LABOUR** In in a strictest of labor means breaking down production into small, interconnected tasks, and then allocating these tasks to different workers beant on their suitability to undertake t balour means that muntries prod uce just a small range of goode products sold in global markets For the task efficiently. Whe When applied internationally, ds or services, and may contribute only a small part example, a har of choodate is sach country contributing, perhape, just one ingredient the contain many ingredients hom питетна сmes, with to the final product **SPECIALIZATION** the second fundamental people associated with trade, and results from the division worker, or each producer, production, and is given a specialist code, they are likely tis become efficient contributors of labor. Given that each to the overall process of to the finished product. Hence, specialization can generate further benefits in terms of efficiency and productivity. Specialization can be applied to individuals, firms, machinery and technology, and to whole countries, International specialization is increased when countries use their scarcer then scarce produce just a small range of products in high volume. Mass production apply a surplus of goods to be produced, which can then be exported. This means that goods and resources must be other countries that have also personalized, and produced purchases of their own. imported from When countries specialize, they are likely to become more efficient over time. This is partly because a country\'s producers will become larger and exploit economies of wealth. Faced by large global markets, firms may be new technologies. This can provide a country with a price ice and non-price advantage increasingly competitive and improving its chances of exporting in the future. encouraged to adopt mass production, and over Imas specialized countries, making it apply **THE ADVANTAGES OF TRADE** International trade brings a number of valuable benefits to a country, including: 1\. The exploitation country\'s comparative advantage, which means that trade encourages a country to specialize in producing only those goods and services which it can produce more effectively and efficiently, and at the lowest opportunity cost. 2\. Producing a narrow range of goods and services for the domestic and export market means that a country can produce in at higher volumes, which provides further coat benefits in terms of economies of scale 3\. Trade increases competition and lowers world prices, which provides benefits to consumers by raising the purchasing power of their own income, and leads a rise in consumer surplus. 4\. Trade also breaks down domestic monopolies, which face competition from more efficient foreign firms. The quality of goods and services is likely to increases as competition encourages innovation, design and the application of 5\. new technologies. Trade will also encourage the transfer of technology between countries. 6 Trade is also likely to increase employment, given that employment is closely related to production. Trade means that more will be employed in the export sector and, through the multiplier process, more jobs will be created across the whole economy. **ECONOMIC TERMS** **Specialization** **Markets** A place where goods and services are exchanged. One might imagine a bustling street full of vendors and customers or a stock exchange full of people buying and selling stocks. These are physical manifestations of what we limited to these examples. Goods and services are exchanged at many levels. call a market, but the definition is not **Capital** **Human Capital** Human beings who can perform useful work. This includes physical as well as mental work and specialized skills. Investment in improving human capital is generally through education and training. Accumulation of human capital could also mean hiring people who are useful for doing work. **Financial Capital** Financial capital is essentially just money. It isn\'t just money that is \'in hand\' however, it refers to the ability to use money to acquire other forms of capital. In this way the ability to take on debt by borrowing from someone else is a form of financial capital. High value commodities such as gold are often considered as being another form of financial capital. **Physical Capital** Factories, roads, buildings, and tools are all good examples of physical capital. These are non-human, non-monetary objects that are useful for conducting valuable work. **Social Capital** A company that is well regarded by the populace would have more \'social capital than a company that is poorly regarded, all else being equal. Social capital refers to the power of social networks to accomplish work. This could be due to enhanced communication abilities, or it could be simply customer loyalty. There are many forms that social capital could take. Natural Capital Land, forests, rivers, rainfall, wind, sunlight, animals, and everything else that comprises the natural world is regarded as natural capital. One could think of this as the category that includes everything else other than the above forma of capital Gross Domestic Product Gross domestic product (GDP) is an economic measure intended to represent the sum of all economic activity in a country. Economic activity is measured according to market values. Therefore, GDP is the sum of all market value delivered in a country. Supply The amount of a good or service that producers are willing and able to offer for sale at a given price. Demand The quantity of a good or service that consumers are willing and able to buy at a given price. Price The amount of money that must be paid to purchase a good or service. Monetary policy. The use of a central bank\'s control over the money supply and interest rates to influence the economy.