Question

What is the major reason underlying trade between nations?

Answer 1

The following are the important reasons that encourage nations to engage in trade.

(a) The difference in resource endowment: Every country is endowed with different kinds and combinations of resources. Thus, in order to obtain the resources which are not domestically available but are available in other countries, nations trade with one another.

(b) Aim of attaining specialisation: Because of the availability of distinct resources, culture, labour force and technical know-how, every country has a specialisation in particular types of products. Thus, countries trade with an aim of attaining specialisation in the goods in which they have the superior technical know-how or the goods that can be produced only with the domestically available specific resources which are not available in other countries.

(c) The difference in labour productivity and production cost: Production costs and labour productivity differ from one country to another. Thus, countries export the goods which they can produce efficiently at a low production cost. On the other hand, they import the goods which they are not able to produce efficiently at a lower cost.