The Gains From International Trade

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Lower prices

The main reason for trade is lower prices. Consumers buy cheaper final goods and services and producers buy cheaper raw materials and semi-manifactured goods. Price is affected by a country's access to natural resources, the quality of their labour force, the quality of their capital, or their level of technology. This concept is connected to comparative advantage (HL). 

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Greater Choice

International trade gives consumers access to products from other countries. 

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Difference in Resources

International trade allows countries to import resources that they need but don't have. This is mainly about natural resources. Singapore is an example of a country that has to import nearly every natural resource in order to survive, but can afford these imports by exporting a large number of final products. 

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Economies of Scale

The size of the market, and therefore demand, increase when a firm is producing for foreign consumers as well as domestic ones. This allows economies of scale to be achieved that result in more specialization within the firms, more division of labour, and more specialization within the country. All of these contribute to greater efficiency, and lead to lower long-run average costs.

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Increased Competition

Domestic firms must compete with foreign firms, and are forced to increase their efficiency. They also must provide a higher quality, and more variety, of goods. 

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More Efficient Allocation of Resources

Free trade allows countries that are best at producing specific products to produce them, and trade for the products that they could not produce efficiently. When all countries are using their resources as efficiently as possible, all of the world's resources are being used efficiently.

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Source of Foreign Exchange

Countries that don't have a convertible currency (notably developing countries), they can export goods to earn foreign currency which they can then use to purchase goods and services from other countries on the world market.

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