Question

Explain the factors affecting trade between two countries.

Explain the factors affecting trade.

Answer 1

Trade refers to the transfer of goods or services from one person to another or from one country to another. Factors which affect the trade are natural resources, climate, population, culture, economic cost, specialization, etc.

1. Natural resources: The distribution of natural resources is uneven. The natural resources available in one country differ from another. Because of this uneven distribution of resources, there is trade between resource surplus and resource deficit.
2. Climate: Climate mainly affects the plants and animals in a region. In areas of different climates, there are different types of plants and animals, for example, in tropical countries like Sri Lanka, whose major export is tea or Malaysia and Indonesia, whose major export is rubber. This occurs naturally because of these countries' favourable climates for growing tea and rubber plants.
3. Population: Population size, distribution, and density differ in countries. This leads to differences in production and consumption, and hence trade occurs. The standard of living can also determine the demand for various goods and services. A country with less population depends more on trade because fewer human resources are engaged in the production of goods.
4. Culture: Some countries are known for their specific art and craft, based on their culture and specific production of goods with a worldwide market, e.g., Kashmiri shawls or Iranian carpets.
5. Economic Cost: The cost of production is the major factor in the process of production. Importing certain goods is cheaper than producing them in the country itself. For example, importing tea from India and Sri Lanka is cheaper than producing it in England.
6. Specialisation: Due to highly favourable factors of production, some countries have specialisation for certain goods, and they have name and fame in the world market, so they develop export trade. For example, watches from Switzerland, electronic goods from Japan, or tender beef from Argentina.
7. Government Policy: Government policy about export or import affects trade. For example, the Government may increase import duties on some goods to encourage people to buy domestic goods. Thus, the import trade of those goods goes down.