introduction to trade
AN INTRODUCTION TO TRADE International trade Free trade refers to the exchange of goods and services across international boundaries without trade restriction. ... Assumptions Assuming there are only two countries in the world and only two commodities enter into international trade. ... There is no currency nor trade restrictions as trade can take place freely with both countries operating at full employment level. ... Theory of comparative advantage The principle of the comparative advantage states that even when a country has absolute advantage over the other in producing both commodities, both countries can specialize in producing that good in which it a lower opportunity cost and gain from trade. Advantages of specialization and trade After specialization, it is able to gain access to goods and services which cannot be produced locally due to lack of favorable climate or factors of production. ... With international trade, it aid in stimulating economic development and growth. ... Disadvantages of free trade Foreign trade may lead to exhaustion of essential materials and minerals of a country which cannot be replaced. Foreign trade exposes home industries to outside competition and even to the extent of dumping of foreign goods. ... With free trade, it lacks of economic diversification. ... Foreign trade may adversely affect the consumption habits of inhabitants of a country through the importing of harmful commodities such as drugs, opium and alcohol. Limitations to specialization and trade If the transport costs are greater than price differentials between countries in the absence of trade, trade cannot take place.