ECONOMIC INTERDEPENDENCE AND INTERNATIONAL TRADE

International trade is the voluntary exchange of goods

and services between people in different nations. For thousands of years people have benefited from international trade, which provides them with products not available in their homeland. By the mid-1980s international trade amounted to about $2 trillion annually.

At the basis of international trade are the concepts of specialization and economic interdependence. When individuals or businesses produce a single or very narrow range of products, it is called specialization. Many individuals and businesses specialize because by concentrating their efforts on the production of a narrow range of products they are able to increase productivity.

Specialization, however, leads to a decrease in self-sufficiency. If individuals and businesses concentrate on the production of specific goods and services, they must rely on other people to furnish the remaining products that are needed to satisfy their wants and needs. Economists call such dependence economic interdependence.

The same process of specialization and economic interdependence takes place on a national level in international trade. As people in various nations specialize to use their resources better, the nations become less self-sufficient. The political and business leaders of these nations turn to international trade to fulfill some of their wants and needs.

Absolute and comparative advantage.

The world's resources are unevenly distributed. Each nation has a different quantity and quality of natural, human and capital resources. The unequal distribution of resources affects what and how much goods and services a nation can produce.

Two concepts help people to decide which goods and services to produce for export. The two concepts are: absolute advantage and comparative advantage.

Absolute Advantage

The distribution of resources often gives a nation an absolute advantage in the production of a particular product. Absolute advantage means that using the same resources one nation can produce a product at a lower cost than a second nation.

Brazil, for example, enjoys an absolute advantage over the United States in coffee production. Brazil's resources - especially its land, climate and inexpensive labor force - enable it to produce large quantities of coffee at a relatively low price compared to the costs for coffee production in the United States. Thus, it is to Brazil's advantage to export coffee to the United States.

The United States, on the other hand, enjoys an absolute advantage over Brazil in many other areas, particularly in —the production of manufactured goods. The United States has well-tapped natural resources, a highly skilled labor force and well-developed means of production for consumer and "capital goods. Thus, it is to the advantage of the United States to export manufactured goods to Brazil.

Comparative Advantage

Although nations have an absolute advantage in the production of numerous goods and services, they generally specialize in the production of those items in which they have a comparative advantage. A comparative advantage is the advantage that arises from being able to produce a product at a lower opportunity cost relative to other products.

A nation determines its areas of comparative advantage by calculating the economic benefitsreceived from producing various goods and services.* The nation then -chooses to specialize in the production of those goods and services that provide the greatest economic benefits. In other words, the nation specializes in those products that can be produced at the least expense relative to the other products that the nation might produce.

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