The Rationale for Trade

The Rationale for Trade

International trade can be derived from the principles of necessity or convenience. Necessary trade goods are usually resources and raw materials that cannot be easily substituted, conferring an enduring absolute advantage. Trade goods of convenience can be substituted and replicated, implying comparative advantages that may change in time. This commonly involves parts and finished goods that are manufactured at locations due to some temporary advantages such as land, labor, energy, or even exchange rates.

International trade is also influenced by the level of scarcity of a good, which can be functional (limited availability of the resource) or geographical (concentration of the resource). In the case that a necessary resource is scarce, the locations providing them will be important points of export, often judged to be of strategic importance. The outcome is a substantial level of international trade, which has been observed in the energy and mining sectors. These resources are not necessarily scarce in their availability, but in their geographical distribution, including the capital investments required to make them available. For parts and finished goods, the concept of scarcity is linked with their level of complexity and at times with patent protection. This implies that only a few manufacturers are able to provide a good, creating an oligopoly or even a monopoly. In this case, an extensive trade network can be established.

In the case where resources are abundant, there is more localized production and less international trade since they are more readily available. For parts and finished goods, abundance mainly implies that the resources to manufacture them are inexpensive and that the processes can be easily replicated. The trade networks supporting abundant goods tend to be less extensive and regional in orientation.

The concept of scarcity and abundance can change with technological developments as more resources can be made available.