Trade is the exchange of products between two parties for direct or deferred payment. In barter, goods are exchanged for each other, but this can also be done by using money or credit. If there is no payment, the exchange is not a trade, but a gift if the product is exchanged voluntarily, or theft if the product is appropriated without permission. Broker.cex.io is there to guide you about trading
Because the transport of goods has become much simpler and cheaper in the 20th century, international trade has become increasingly important. This is an important form of globalization.
In many countries trade is taxed: traders who earn money from a transaction must pay a percentage of the surplus-value to the state ( VAT ).
The term entrepreneurial spirit denotes resourcefulness, creativity, and the drive to make money from the trade.
Based on economic drivers, a distinction can be made between three types of trade. The motive can be:
- the difference in production costs ;
● a shortage;
● economic cycles.
The Difference In Production Costs
A product may be available, but it may be cheaper elsewhere. This can occur due to lower production costs, possibly due to competition. If the price is still cheaper after transport and import duties, then someone will most likely set up a trade.
Absolute And Comparative Advantage
If one is better at producing one item in one place and better at another place, then both parties benefit from trade. This principle, known as an absolute benefit, came to be known through Adam Smith. But even if one country is better able to make both products than another, it pays to specialize in the product that benefits the most and get the other from the other. This is what David Ricardo called the comparative advantage.
While these two principles mean that the entire country will benefit from free trade, this does not necessarily apply to groups within a country. If one works in an industry that cannot cope with international competition and cannot be retrained, then there may well be local disadvantages. Of course, the same applies if one has invested in these industries. This is why protectionist measures will often be called for.
Absolute or comparative advantage can be achieved through economies of scale: it is less work for one baker to bake two loaves than for two bakers to bake one loaf each. As a result, specialization makes the production of goods more efficient. An important motive for trade is therefore the division of labor resulting from this specialization.
A country or region can also gain an advantage through a technological lead. This was the case, for example, in the nineteenth century for the British textile industry. Due to the high costs of entering the aircraft industry, for example, the lead can be long-lasting. Consumers may also want to have more choices. Manufacturers respond to this through product differentiation.
The population as well as economic resources are not evenly distributed around the world. A shortage of a product in one place and a surplus in another place often occurs in raw materials and natural resources, but also in semi-finished products. Trade does not only arise because raw materials do not exist equally all over the world, but also because they can be mined more cheaply in one place than in another.
The Heckscher-Ohlin model is based on the production factors present in a country. Since these are different in each country, each country will benefit most from a different specialization. The specializations are divided in the ISIC into different sectors, each of which has a different need for trade.
The difference between this supply and demand results in a price difference. These market forces initiate trade. The price difference depends on both supply and demand, which can be expressed in the price elasticity of a product. Demand is also strongly related to income, which can be expressed in income elasticity. With an increasing income, the demand for inferior goods will fall, while that for normal goods will rise. The demand for luxury goods is even growing faster than income.
The Slutsky equation includes both the income and substitution effect. If the price becomes too high, they will look for a substitute good. For example, the difference in oil demand can be explained after the 1973 oil crisis and the 1979 oil crisis. In 1973 the income effect was dominant.
Oil was still a primary good so that a larger part of the income had to be spent on it. As a result, there was less left to spend on other things, resulting in a global recession. However, in 1979 it was technically possible for power plants to switch to gas and coal. This resulted in a sharp drop in oil demand, a good example of the substitution effect.