Level: SL and HL. Sections marked HL only are for Higher Level students.
Countries trade because no country can produce everything it needs as cheaply as others can. This topic explains why trade raises living standards, shows trade on a demand and supply diagram, and (HL) uses comparative advantage to show why both partners can gain.
4.1.1 Reasons for trade and the benefits of trade
Definition
International trade is the exchange of goods and services across national borders. Exports are goods and services sold to other countries; imports are goods and services bought from other countries.
- Lower prices for consumers: imports are often cheaper than domestic output, which raises real incomes.
- Greater choice: consumers can buy products that cannot be made at home, such as Indian consumers buying Swiss watches or Japanese consumers buying Darjeeling tea.
- Differences in factor endowments: countries have different resources. Saudi Arabia exports oil; Brazil exports soybeans and iron ore; India exports IT and business services, using its large English-speaking skilled workforce.
- Economies of scale: selling to world markets lets firms produce at a larger scale and lower average cost, as Korean shipbuilders and Indian generic drug makers do.
- Increased competition and efficiency: domestic firms must cut costs and improve quality to compete with imports.
- Access to resources and technology: imports of machinery and components help firms produce more; trade spreads new technology and ideas.
- Source of foreign exchange: export earnings pay for imports of essential goods such as oil and capital equipment.
- More efficient allocation of resources: countries specialise in what they produce relatively well, raising world output.
Example
India's merchandise and services exports together have grown to roughly US$800 billion a year. Services exports such as software, IT-enabled services and consultancy now earn a large share of India's foreign exchange, while smartphone assembly has made electronics one of its fastest-growing goods exports. Vietnam's rise as an exporter of electronics and clothing has lifted millions out of poverty since the 1990s.
🔒 Also in the full notes
- 4.1.2 Free trade: imports and exports on a diagram
- 4.1.3 Absolute and comparative advantage (HL only)
- 4.1.4 Limitations of the theory of comparative advantage (HL only)
- Exam practice: 5 questions with mark allocations
- 2 exemplar answers with full model answers and examiner commentary
Join to unlock the full notesAlready a member? Log in