Specialisation & Free Trade

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, near self-sufficient economies such as the United States and China import and export trillions of dollars each year.

Countries trade for three broad reasons.

• Different resources. 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 cheaply.
• Different costs. Even when two countries can make the same product, one is usually cheaper at it. Concentrating on the goods each makes most cheaply, and trading for the rest, raises total output.
• Different tastes. Consumers want variety. Even a country that can make every good itself may still want German cars, French wine, Italian fashion or Japanese electronics.

The first two of these are the basis for specialisation by country.