4.1.1 Benefits of International Trade Notes

International trade brings in a number of benefits. However, there are even greater benefits if the trade is free.

Benefits of International Trade

Increased competition

International trade exposes domestic firms to global competition.

1. The competition pushes domestic producers to improve the quality of their products, while also trying to minimise their costs of production in order to stay competitive against foreign firms and their respective prices.
2. This leads to domestic firms to becoming more efficient and reducing prices for consumers.

Lower prices for consumers

1. International trade allows foreign companies to enter the markets at lower prices. Thereby, consumers are able to buy less expensive products.
2. Further, as international trade leads to increased competition and increased efficiency for domestic firms, this will also lead to a reduction in prices of domestic products for consumers.

Greater choice

1. With international trade, countries can import various goods and services from other countries.
2. This enables consumers to have a greater choice of products.

Acquisition of resources

1. Countries can import natural resources (timber or oil) or capital goods (machinery) that are unavailable domestically.
2. This allows them to expand their production capabilities.

More foreign exchange earnings

1. When exporting goods, countries acquire foreign currencies which can be utilised to pay for imports from other countries.
2. It can also be used to make payments abroad (we will explore this concept in subtopic 4.6)

Access to larger markets

1. Domestic firms can grow and expand their production by selling products in international markets if the output of the firm is limited by the size of the domestic market.
2. This leads to larger sales and a larger consumer base for the firm.

Economies of scale

1. Increasing the market size for a firm from domestic markets to domestic and international markets causes the demand to increase.
2. This causes to the production level and size of production to increase as well, which leads to a fall in average costs and provides economies of scale to the firms.
3. This allows the firms to reduce their prices for consumers too.

More efficient resource allocation

1. When free trade takes place, each country specialises in producing the goods and services it can produce more efficiently with a lower cost of production than other countries.
2. This reduces the waste of scarce resources and thereby more efficient resource allocation.

More efficient production

1. The competition from foreign firms forces domestic firms to improve their quality of the product and reduce costs of production in order to retain its revenue and supply to the market.