Why do Nations Trade?

• TRADE ALLOWS nations to consume beyond their maximum domestic production possibility curve.
  
• There is an uneven distribution of natural, human and capital resources among nations. Therefore different countries have comparative advantages (NOT absolute) on different products.
• Efficient production of various goods requires different technologies and combinations of resources. Thus it may be more efficient if countries specialize.
• Products are differentiated as to quality and nonprice attributes (eg. French wine as opposed to Californian wine). People may prefer imported goods rather than domestic manufactured goods.
  

Labor Intensive Goods: Goods that require a large amount of people in the labor force to produce. eg. electronics like digital cameras, video game players, DVD players, which require skilled labor (Japan)

Land Intensive Goods: Goods that require a large amount of land to produce. eg. crop or harvested goods like coffee, wheat, wool, and meat (Brazil)

Capital Intensive Goods: Goods that require a sufficient level of technology to produce. eg. automobiles, agricultural equipment, machinery, and chemicals (Germany, USA)

• Regardless of labor, land, or capital intesity in a nation, any nation may have a niche in trading certain products based on the unique qualities of those products.

• Thus, by allowing specialization to occur through trade, in which countries produce goods according to their resource avaliability, each trading country can acquire more goods and services.
• The distributions, technology, and product distinctiveness can change. As changes occur, the relative efficiency with which a nation can produce specific goods will also change.