🌍 Why Do Countries Trade?
No country can produce everything it needs efficiently. International trade allows countries to specialise in what they do best and exchange for goods they produce less efficiently.
Key concepts: International trade.
Reasons countries trade
- Uneven distribution of resources — oil, minerals, fertile land are not equally spread across countries.
- Different factor endowments — some countries have abundant labour (e.g. Bangladesh), others abundant capital (e.g. Japan).
- Differences in technology and skills — Germany excels in engineering, India in IT services.
- Consumer preferences — people want variety: Italian pasta, Japanese electronics, Colombian coffee.
Trade is not a zero-sum game. Both the exporter and importer can be better off — this is the key insight behind comparative advantage.
📊 Absolute and Comparative Advantage
Absolute advantage
Absolute advantage.
Example: If Brazil can produce 100 tonnes of coffee with the same resources that Colombia uses to produce 80 tonnes, Brazil has an absolute advantage in coffee.
Comparative advantage (David Ricardo)
Comparative advantage.
Numerical example: Country A: 10 units of cloth OR 5 units of wine. Country B: 6 units of cloth OR 2 units of wine.
Opportunity costs: • A: 1 cloth costs 0.5 wine; 1 wine costs 2 cloth • B: 1 cloth costs 0.33 wine; 1 wine costs 3 cloth
A has comparative advantage in wine (lower OC: 2 cloth vs 3 cloth). B has comparative advantage in cloth (lower OC: 0.33 wine vs 0.5 wine).
IB exam tip: Always calculate opportunity costs for BOTH goods in BOTH countries. The country with the lower opportunity cost in a good has the comparative advantage in that good.
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📈 Specialisation and the PPC
The production possibilities curve (PPC) shows how comparative advantage leads to gains from trade.
- Without trade — each country produces on its own PPC, consuming only what it produces.
- With specialisation — each country moves production toward its comparative advantage good.
- With trade — both countries can consume beyond their individual PPCs — this is the gain from trade.
Gains from trade.
PPC diagram tip: In your IB diagram, show the consumption point outside the PPC after trade. Label clearly: PPC, production point, consumption point with trade, and the trade triangle (exports traded for imports).