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Globalization - The Benefits of Trade

Updated on August 6, 2010

Globalization - The Benefits of Trade

International trade allows participating countries to benefit from specializing in products and services in which they have a comparative advantage over other countries. In other words it is more cost effective for them to to specialize in a certain product. For example, Italy has a comparative advantage over Israel in wine production, since the climate is good for growing grapes. Israel on the other hand has a comparative advantage over Italy in the production of citrus fruit, since the hot climate is more friendly for growing citrus.

If there was no international trade, all countries would have to meet its own needs. In other words Italy would have to grow its own citrus fruit and Israel would have to make its own wine. Even if this was possible, it would be highly inefficient. Through international trade it is possible for Italy to specialize in making wine and Israel to grow citrus fruit. This increases productivity and thus raises the living standards in both countries. 

With specialization comes greater efficiency, meaning countries who specialize can produce goods and services at a lower cost. At the same time, smaller countries countries can achieve economies of scale through accessing the foreign market. For instance, a small country like Ghana specializes in cacao production, but only because they have access to the foreign market. The domestic market is not big enough for them to benefit from the reduced cost of specialization, while the fact that they can export makes it worth while. 

When it comes to trade between developed nations and developing nations, it is usually based on the comparative advantage nations have in the productions of technology and the comparative advantage developing nations have in raw materials and labor. Developed nations tend to import natural resources(such as oil), agricultural staples, and simple manufactured goods(such as textiles) from developing nations. In exchange they export high-tech machinery(such as manufacturing equipment) and consumer goods(such as cell phones). This trade is equally crucial for the poor and rich economies alike.

Other benefits of trade is the increase in choices for consumers. Without international trade, Americans won't have bananas during winter or chocolate at any time. International trade is more than just the market of goods and services though. Ideas, technologies and lifestyles is also part of that marketplace. Aside from influencing taste ans broadening cultural boundaries, global interaction also promotes peace, because trade increases economic development and prosperity, which in turn creates peace. 

To sum up - International trade allows nations to specialize in certain industries by relieving them of having to meet all their domestic needs with domestic products. 

Source: The Bedside Baccalaureate 

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