Need for International Trade and Business

No country is endowed with every natural resource, every climate, and every skill it needs in exactly the quantity it needs. One region may have abundant mineral deposits but limited manufacturing skill; another may have a climate ideal for growing a particular crop but no reserves of a key mineral. This uneven distribution of natural resources, climate, and human skills across the world is the most basic reason international trade exists: a country imports what it lacks and exports what it has in relative abundance, so that available world resources are used more fully than if every country tried to be self-sufficient.

A closely related idea is the principle of comparative advantage. Even if one country could produce every good more efficiently than another, both countries still gain by trading, because each benefits by concentrating its own resources on the good or service it can produce relatively most efficiently — that is, at the lowest opportunity cost — and importing the rest from a country that can produce them relatively more efficiently in turn. This is a different and more powerful idea than simply saying a country should only produce what it is best in the world at; comparative advantage explains why trade benefits both a highly efficient economy and a less efficient one, as long as each specialises according to its own relative strengths.

International trade and business are also needed because a firm's home market is, sooner or later, limited in size. Once a firm has captured most of the demand it reasonably can within its own country, entering foreign markets is often the only way to keep growing sales and profits. Access to a much larger combined market also allows a firm to achieve economies of scale — producing at a larger volume brings down the average cost per unit, because fixed costs such as plant, machinery, and research spending are spread over many more units of output than a purely domestic scale of production would allow. …