Globalisation - Why nations participate and reasons for restrictions
Uploaded by cainen on Dec 11, 2001
Why do nations trade? Outline changes to world trade as a result of globalisation. Discuss any justifications for restricting trade.
Various nations participate in world trade for a variety of reasons. Three major factors which motivate nations to trade are factor endowments, absolute advantage and comparative advantage. There are also many other benefits, which can be gained from world trade. These include increased production resulting in increased GDP and higher rates of economic growth, higher standards of living and also increased employment. The vast increase in globalisation has resulted in many countries becoming more efficient in specialised industries. Despite all of the above-mentioned benefits, nations still restrict trade to protect their domestic producers.
Each country has a different availability of resources. This is known as having different factor endowments. These differences exist for:
- Natural Resources
- Human Capital
- Human Made Capital
A country will trade with another country to allow for greater access to those goods and services that it cannot produce efficiently and at a reasonable price.
If a country can produce more of a good or service, using the least resources then it is said to have an absolute advantage. If one country has an absolute advantage in a particular product, then that product may be cheaper coming from that country so the other country will trade to get the cheaper product.
Comparative advantage is similar to absolute advantage. The difference is that it is when one country is relatively more efficient at producing one good or service than the other. It allows countries to specialise in the production of a good or service in which they have comparative advantage. Simply, the country with the lowest opportunity cost for producing one good has a comparative advantage. With a country specialising in a particular good or service, economies of scale apply and a country is able to produce the good or service more efficiently and cheaper than another country, hence countries trade to get the cheaper product.
When a country can specialise in a particular product, it allows for that country to have increased production. Production contributes to the nations Gross Domestic Product (GDP) or Gross National Product (GNP). This is the value of all things produced in a country in a year. If a country is producing more, then real output increases which is recorded in the GDP which in turn results in higher levels of economic growth. These are all reasons why nations take part in...