Global Business: Trade, Broken Down

In business, trade is a big word. Not in the sense of how you spell it, but rather how we use it, as there are many compartments to trading with different countries. From exports, to labor, to production and prices, trade isn’t just the exchanging of goods. Lets break it down and use the example of clothing.

Let’s say you are trying to create the next best fashion line, but you’re new to the game of trade, so you’re not sure how it works. You have the ideas in your head, but your country doesn’t have the fabric that you need for the price that you want, and the cost of labor in the US is pretty high, so you start to look elsewhere. You find that India has some beautiful fabrics that are the exact look you’re going for, and the price; unbeatable. In order for this beautiful fabric to be made however, is more often than not, through human labor. By hiring people to make the product, they have to up the price a bit more to pay the laborers (unless you are talking sweatshops and child labor which are often at no cost).

Since silk is a natural resource in India, according to the father of economics, Adam Smith, this would mean that India  would be able to produce the silk (or desired product) in less labor hours than say a country where silk is not naturally found. This is called the absolute advantage. In summary, his theory deemed that each country would specialize in products in which it was uniquely suited for, where more would be produced for less, thus you get your silk fabric. David Ricardo would later go onto work off this theory, coining a new term called “comparative advantage”, which simply means that a country with an apparent disadvantage in a natural resource could engage in foreign trade and then both countries win.

This idea of “comparative advantage” can be broken down even further, because it allows us to focus on one thing; our jobs. Think about it; if you had to grow the fabric to make your own clothes, or grow the food to feed your family, would you have time for anything else, let alone providing an income? The answer is no. Which is why trade is so important, and why comparative advantage explains the importance. By allowing different nations to focus on what they do best (be that manufacturing cars, fabric, corn, pasta ect.) then we have the time to focus on other things, like that clothing line. India will provide the fabric, Mexico could provide the labor, and then you can provide the final product for the customers, thus working with other countries as you go. A win for one country is a win for another and there you have it; trade explained.

If you had to sum up the importance of trade in three sentences, how would you phrase it, and what would you include? To you, what is the most important thing about trade itself?

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