Chapter 9: Problem 1

Briefly explain how international trade increases a country's consumption.

Short Answer

Expert verified

International trade increases a country's consumption by allowing specialization in goods where the country has a comparative advantage, expanding market horizons, fostering competition, providing consumers with a wider variety of goods at potentially lower costs, and enabling production at large scales that can yield economies of scale.

Step by step solution

Understanding Trade and Specialization

International trade allows countries to specialize in the production of goods and services where they have a comparative advantage. This means they can produce these items more efficiently and at a lower opportunity cost than other products. This leads to improved productivity, and with more producible goods, a country can increase its consumption.

Market Expansion Through Trade

International trade expands market possibilities for producers. They are not only restricted to domestic markets but also have access to the global consumer base. With a broader market, production is increased, leading to a potential increase in consumption.

Role of Competition

Trade fosters competition, which can lead to the production of better goods and services at a reduced cost. Improved quality attracts more consumers and the price reduction makes more goods affordable, hence increasing consumption.

Impact on Consumers

Consumers benefit from a greater variety of goods and services due to international trade. They have access to products that may not be produced domestically, which exceeds their consumption possibilities.

Economies of Scale

International trade can allow countries to produce goods on a larger scale, which can result in economies of scale. This can lower the cost of production per unit, making goods more affordable and potentially increasing consumption.