Basic Text. Forms of International Trade

International trade is the exchange of goods and services between one country and another. This

exchange takes place because of differences in costs of production between countries, and because

it increases the economic welfare of each country by widening the range of goods and services

available for consumption. Ricardo showed by the law of comparative advantage that it was not

necessary for one country to have an absolute cost advantage in the production of a commodity for

it to find a partner willing to trade. Even if a country produced all commodities more expensively

than any other, trade to the benefit of all could take place provided only that the relative costs of

production of the different commodities were favourable.

Differences in costs of production exist because countries are differently endowed with the resources

required. Countries differ as to the type and quantity of raw materials within their borders,

their climate, the skill and size of their labour force, their stock of physical capital and their institutions

(institutional economics). Countries will tend to export those commodities whose production

requires relatively more than other commodities of those resources (factors of production) of which

it has most (Heckscher-Ohlin principle). By increasing the scope for the specialization of labour

(division of labour) and for achieving economies of scale by the enlargement of markets, there is

a presumption that international trade should be free from restrictions (free trade).