Why Nations Trade: Specialization and Exchange

Countries trade for the same reason individuals do: specializing in what you do relatively well and exchanging for the rest usually leaves everyone with more. Some trade is driven by nature, since Iceland cannot grow bananas and Japan has little oil. Much more is driven by differences in skills, technology and capital, and by the cost savings of producing at large scale. Trade also widens consumer choice, increases competition that pushes firms to improve, and spreads new technologies.

Since 1950 world trade has grown much faster than world output, so exports now account for a far larger share of global GDP than in the mid-twentieth century. Yet trade reshapes economies: industries that cannot compete with imports shrink, and their workers and towns may struggle, even when the nation gains overall. The rest of this unit examines the theories that explain trade and the policies governments use to shape it.