Q.What is the major reason underlying trade between nations?

Nations cannot produce all goods equally well or equally cheaply, because natural resources, factors of production (labour, capital, raw materials) and productivity levels differ from country to country. So each nation specialises in what it can produce most efficiently and trades for the rest — this geographical specialisation is the major reason trade takes place between nations.

The fundamental reason

Countries cannot produce equally well or equally cheaply all that they need. This happens for two basic reasons:

• the unequal distribution of natural resources among nations, and
• differences in productivity levels.

Why costs and capabilities differ

• The availability of factors of production — labour, capital and raw materials — differs from nation to nation.
• So do labour productivity and production costs, owing to varied socio-economic, geographical and political conditions.
• Because of these differences, one country is often better placed to produce certain goods of better quality and/or at lower cost than others can.

Specialise and trade

Since some countries hold an advantage in producing certain goods that others cannot make as efficiently, it becomes worthwhile for each country to:

1. produce at home the select goods and services it can make most efficiently, and
2. procure the rest through trade with other countries that can make those goods more cheaply.

This is precisely why nations trade with one another and engage in international business.

Geographical specialisation / territorial division of labour

• International business today is largely the result of geographical specialisation.
• The same logic explains trade within a country too — for example, within India, West Bengal specialises in jute products while Mumbai and Maharashtra are more involved with cotton textiles.
• Internationally, many developing countries, being labour-abundant, specialise in producing and exporting garments, while importing textile machinery from developed nations that can make it more efficiently.