Foreign Trade

Introduction

Scarcity prevents any country from being entirely self-sufficient. As the demand for novel goods and services is rapidly increasing in the world, nations resort to international trade. Although there are clear disadvantages of foreign exchange, the vast numbers of benefits most definitely outweigh the negatives. Research indicates the intriguing influence foreign trade has had on both developing and developed countries due to basic principles such as comparative advantage. This model is strongly evident when looking at oil exports between the Middle East and the United States, which will be a primarily focus of this topic. Interestingly, research reveals that trade not only fosters the growth of a country’s economy but also has positive effects on aspects such as the overall welfare and developed of people. The example of the global retail chain Primark providing employment and bringing in revenue to all countries involved in this cooperation is shown below to further emphasize the importance of trade between nations.  

Comparative advantage and the growth of trade

The primary model of comparative advantage brought forth by David Ricardo in 1817 (Maneschi., 2004) establishes the fundamental reason as to why countries engage in foreign trade in the first place, while also determining which goods and services are traded. For example two countries may have sufficient recourses and labor (in different quantities)(Deardorff., 2011) to produce a particular good. However one country may be more efficient at doing so implying that, that particular country has a relative advantage (Morrow., 2010) over the other at producing that commodity or service. This advantage may arise for many reasons. For example if one of the countries under consideration produces the commodity with less labor and/or recourses than the

other per unit output (Deardorff., 2011), then that country is at an advantage and would receive a maximum profit from exportation of that...