Countries trade products Essay

In the world market, countries trade products they wouldnt be able to produce on their own. Countries like Cuba specializes in cigar deed, Japan in electronics, and Russia in rocket technology. However, even if a sphere has an absolute advantage in producing all goods, they still will benefit from trade. galore(postnominal) stinting factors are involved with trade. Among the major factors are opportunity costs, comparative advantage, specialization and finally trade.Opportunity cost is defined as the value of the scoop alternative forgone when an item or activity is elect. In other words, opportunity cost is the cost of choice. For example the opportunity cost of producing a car is the sentence that couldve been used to produce something else, say newsprint. For a coarse (country A) that has an absolute advantage ( the ability to produce something using fewer resources than other producers use ) in producing some(prenominal) cars and paper, the opportunity cost of producing s ay, 1 car is the production of 3 tons of paper. Thus, what product a country chooses to specialize on must be chosen so as to produce as much as possible while suffering as little opportunity cost as possible.Which goods the country should specialize on should be monitored by the law of comparative advantage, which states that the country with the lowest opportunity cost of producing a particular good should specialize in producing that good. By specializing on a certain good, a country lowers the opportunity cost of that good by forgoing production of other goods. For example evidence country A has an absolute advantage in producing cars as well as paper, and the opportunity cost of producing 1 car is 3 tons of paper. kingdom B however, produces 1 car at an opportunity cost of 6 tons of paper. If these two countries specialized according to comparative advantage, country A produces 2 cars whilst country B produces 12 tons of paper. Therefore, country B should concentrate on solel y producing paper and hand over the job of car production entirely to country A.To gain the maximum benefits of specialization among countries, countries should trade their products with products from other countries. In the example above, the total output of cars and paper has increased as a resultof specialization. But exactly how much should both countries trade to gain the highest possible benefits? By trading 1 car for 4 tons of paper, country A will gain 1 ton of paper while country B gains 2 tons of paper. Hence, both countries gain more paper by trade without increasing their resources.Country ACountry BCars Paper (tons) Cars Paper (tons)Without tradeProduction and consumption 1 3 1 6With TradeProduction 2 0 0 12Trade Gives 1 Gets 4 Gets 1 Gives 4Consumption 1 4 1 8Gains from TradeIncrease in Consumption None +1 ton None +2 tonsIn conclusion, all the economic factors mentioned combined with trade allows benefits even to a country that has the ability to produce goods while u sing fewer resources than other countries.