why do countries trade

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1、whydocountriestrade?TheAdvantagesofInternationalTradeCountriesneedtoexportgoodsandservicestofinanceimportsofthoseproductstheycannotproduceinthiscountry.ExportsrepresentaninjectionofdemandintothecircularflowofincomeThereisanimprovementineconomicwelfareifcountriesspecializeintheproductsinwhichthe

2、yhaveancomparativeadvantageandthentradewithothernationsTradeallowsfirmstoexploitscaleeconomiesbyoperatinginlargermarkets-theEuropeanUnionhasover450millionconsumerswithamassivepurchasingpower.EconomiesofscaleleadtoloweraveragecostsofproductionthatmightbepassedontoconsumersInternationalcompetitio

3、nstimulateshigherefficiency-particularlyfordomesticmonopolies.FreetradeprovidesgreaterchoiceforconsumersandcompetitionhelpskeeppricesdownImportscanhelptosatisfyexcessdemandfromconsumers-actingasasafetyvalvefortheeconomy.Atradedeficitduringaneconomicboomhelpstoreducedemand-pullinflationTradeinid

4、easstimulatesproductandprocessinnovationsthatgeneratesbetterproductsGainsfromtradeusingsupplyanddemandanalysis ThediagramshowsJapancanproducecamcordersatlowercosts-itssupplycurveislowerthantheUK.ThismeansthatJapanhasacomparativeadvantageinproducingcamcorders. Intheabsenceofinternationaltradebet

5、weenthetwocountries,BritishconsumerswouldhavetobuyatahigherequilibriumpricethanJapaneseconsumers.SinceJapanismoreefficient,itmakessenseforJapantospecialiseinproductionofcamcordersandexporttheirsurplusoutputtotheUKatalowerfreetradeprice.Attheintermediatepriceshowninthediagram,(thefreetradeprice)

6、JapansellsexportstotheUKforahigherpricebutthisisstilllowerthantheUKequilibriumprice.Japanreceivesrevenuefromthesaleoftheseexports. UKconsumerscannowbuymorecamcordersatalowerpriceandhavemorechoiceinthemarket Weareignoringtransportationcostsbetweenthetwocountriesandweareassumingthattheresourcesth

7、atwerepreviouslyallocatedtoproducingcamcordersintheUKcanbereallocatedtootherindustries(i.e.resourcesareassumedtobeoccupationallymobile).economicargumentsforimposingimportcontrolsInfantIndustryArgumentCertainindustriespossessapoten