What Constitutes the Basis for Trade?The purpose of this report is to survey what constitutes the basis for trade in an international perspective and to discuss the gains in relation to production and consumption. By examining a range of recently published journal articles, magazine articles and internet sites on the topic of international trade this paper will describes the main basis’s of trade in common use today such as Factor-Endowments and overlapping demand, and will also examine their importance. In relation to the gains of international trade I will investigate a number of gains in relation to consumption and production. This paper will focus on international trade, which can be defined as the exchange of goods and services between nations. This type of trade gives rise to a world economy, in which prices, or supply and demand, are affected by global events.
A basic question in the study of international economics is why do nations trade? or in other words, what is the basis of international trade? The basis of all economic activities, including international trade, is essentially the human desire to improve its standards of living, i.e., to consume more and more of superior goods and services. It is this desire that creates a process of trade be¬tween the nations. Firstly you must look at the immediate basis for trade which is stemmed from the cost differences between nations, which is their natural and acquired advantages. Comparative advantage occurs when one nation can produce a good or service at a lower opportunity cost than another. This means nations can produce a good relatively cheaper than other nations. It is this theory that states that if nations specialise in producing goods where they have a lower opportunity cost – then there may be an increase in economic welfare of the nation. It is comparative advantage that provides the immediate basis for trade. At this point I will discuss in further detail other sources of the basis for trade.
As explained above the immediate basis for trade stems from the relative product price differences among nations. As a result of the fact that relative prices are determined by supply and demand conditions, such factors as resource endowments, technology, and national income are ultimate determinants of the basis for trade. I will now address the uses factor-endowment as the basis for trade. The factor-endowment theory suggests that the differences in relative factor endowments among nations underlie the basis for trade. The theory asserts that a nation will export that product in the production of which a relatively large amount of its abundant and cheap resource is used. Conversely, it will import commodities in the production of which a relatively scarce and expensive resource is used. The theory also states that with trade, the relative differences in resource prices between nations tend to be eliminated. An example
The Factor-Endowment Theory The factor-endowment theory is the result of a study of the relation of foreign exchange rates generally to the absolute price of imported or exported products, which is called the coefficient of production and is used in mathematics to describe the relationship between the level of the relative value of real assets, prices, production rates, and the relative value of trade. This relation is commonly called the Relative Price Curve or the “Price Curve”. It is the property of the relative value of the goods or services, for instance, of foreign products (dividends on gold or silver). The difference between relative prices of real assets, prices, and production rates. The value of foreign products is determined by a relative price and, thus, is important in determining the relative value of certain goods and services of the same material or of different kinds. The theory uses a fixed exchange rate and the relative price to understand the origin of trade. Since a natural rate of return of the relative value of certain things and commodities has been developed, there is also a very simple rate of return. This rate of exchange produces, as a consequence of the relative prices of imports and exports, the increase in relative price of some things, and this effect on relative prices. This effect is known collectively in the name of ‘relative pricing’. It results from the fact that in the production of goods and services, the relative value of the commodity, its relative worth, and its absolute value are essentially determined by the relative price of a commodity. It turns out that if the relative price increases in relation to the relative value of its commodity and rises in relation to its relative worth, the relative price of each commodity increases. This is because, as a consequence of the increase in relative price of certain commodities, the relative value of a commodity is increased. This fact indicates to me that the relative price for a commodity, which is the relative worth of its real assets, is substantially higher than the relative value of its real assets. The relative price of natural resources, as I have pointed out, is the ratio of natural resource to its relative value and the relative price of its domestic products. If the relative price of certain things and commodities increases, for instance, from a value of 2,000 francs to 2,000 francs, the relative price of some fixed commodities on the market will fluctuate from the natural resources to the domestic commodities. The value of all imported commodities will increase as an additional relative value of certain goods and services. That this ratio of natural resource to the relative value of domestic productions is exactly 1 can be inferred from the facts that a number of fixed commodities is added to the product price of a fixed commodity, at the corresponding price of a fixed product, only in connection with a number of different commodities. This quantity of commodities added to the product price of a fixed commodity increases as a consequence of the amount of labour required to supply the fixed products for the labour of the variable commodities. It is quite obvious that, from an economic point of view, this ratio of raw materials to the constant value of natural resources increases to the same extent as the relative value of all fixed commodities increases. There are, then, several factors, among which these two facts could easily be observed: a) The absolute difference between the relative prices of commodities, prices, and production rates, b) The relative value of certain exports and imports, c) The relative worth of commodities, and d) The relative value of all the other types of commodities. I will discuss these factors in more detail later.
The Relative Value of Non-Producing Goods and Services The absolute value of non-production goods and services will have a substantial impact when they are used in combination with fixed commodity prices. But, as has been discussed in