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Why do countries trade? Explain the advantages of specialisation and free trade. Why do governments use protection?

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Introduction

Practice Essay Question: Why do countries trade? Explain the advantages of specialisation and free trade. Why do governments use protection? International trade has the purpose of sufficing demand for goods and services not readily available within a country. Specialisation and free trade can bring about a situation where countries may take advantage of the concepts of absolute and comparative advantages. However, in the face of globalisation, countries still practice methods of protection (such as tariffs, quotas, subsides, local content rules or voluntary export restraints), using the main justifications including: the infant industry argument, protecting domestic employment, the anti-dumping argument, the defence and self-sufficiency argument and the cheap foreign labour and environmental exploitation argument. International trade refers to the trading between the nations of the global economy. This enables a country to satisfy the demand for goods and services not being readily available in the economy (lack of supply) or another nation produces the goods more efficiently than the country in question. Looking at trading relationship between Australia and Japan, Japan has limited natural resources, so it buys it from Australia due to Australia's competitiveness. Conversely, Australia lacks capital equipment, so it purchases this from Japan. Another reason that countries trade is to take advantage of specialisation and free trade. ...read more.

Middle

described is that where one country has an absolute advantage over the other in production of goods. This then poses the question, why should country C want to trade with country D. This is where the concept of comparative advantage comes into play. The idea is that these two countries have the most productive outcomes (i.e. produce the greatest amount of goods with the least waste in resources. This is where we utilise the concept of opportunity cost. In country C, the opportunity cost of producing 1 unit of kitchenware is 4 units of textiles, while in country D, 1 unit of kitchenware has an opportunity cost of 2 units of textiles. As we can see, it would be more equitable for these two countries to specialise where they are relatively efficient. This would mean that country C should tend to the production of textiles. Table 0.4 Kitchenware Textiles Country RU PPU Total RU PPU Total C 6 1 6 14 4 56 D 20 0.5 10 0 1 0 Total 16 Total 56 Where, RU = Resources Used; Q = Quantity of good produced; PPU = Production per Unit resource; Total = total amount of good produced Table 0.4 shows the reallocation of resources with country C tending to specialisation with some diversified production. ...read more.

Conclusion

Dumping is the practise where a firm sells a high quantity of goods as unsustainably low prices in order to force much competition out o business. Although beneficial to the consumer in the short-term, once local producers go out of business, the firm may raise prices, making it worse for the consumer in the longer term. The defence and self-sufficiency argument is that of countries wanting to retain their own defence industries so that they can be confident that in wartime situation they can produce their own defence equipment. The self-sufficiency argument is very much similar to this defence argument - - for example, Japan is inefficient at food production, yet maintains a high tariff on rice imports; this is because in the 20th century in a time where food imports were restricted by wartime blockades, and the country had experienced famine twice. The growth in international trade has seen a more efficient allocation of resources through the specialisation and the aims of free trade. This efficient reallocation of resources is a result of the concepts absolute and comparative advantage. Even with these advantages, some countries feel it necessary that they use protectionist measures (such as tariffs and quotas) in order to protect their local industries against actions dumping and or for defence and self-sufficiency. ...read more.

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