Free Trade, Comparative Advantage & Protectionism

International trade is the exchange of goods and services between countries. Almost every modern economy buys some things from abroad and sells some things abroad. Even very large self-sufficient economies (the United States, China) import and export trillions of dollars each year.

Countries trade for three reasons.

• Different endowments. Saudi Arabia has oil; New Zealand has grazing land for sheep; Brazil has the climate for coffee. Each can produce some goods that others cannot, or cannot produce as efficiently.
• Different costs. Even when two countries can make the same product, one is usually cheaper at it. Specialising in the cheapest goods and trading for the rest raises total output.
• Different tastes. Consumers want variety. Even if a country can make every good itself, its consumers may still want German cars, French wine, Italian fashion or Japanese electronics.

The theoretical basis for the second of these, and the most important for the IGCSE exam, is comparative advantage.