International trade and finance enables to specialize in the production of those goods in which each country has special advantages. Each country or region is endowed with certain special facilities in the form of natural resources, capital and equipment and efficiency of human powder. Some countries are rich in minerals and in hydroelectric power. Some are blessed with extensive land but have very little population. Some others possess advanced techniques of manufacturing, a very efficient and hard working population and plenty of capital equipment.
In the absence of trade, every country will be forced to produce all types of goods, even those for which they have no facilities for production, International trade, on the other hand, will enable each country to specialize in the commodities in which it has absolute or comparative advantages. Thus, international trade brings about international specialization and also all other advantages associated with such specialization. International trade is the only method by which a country can supplement its storage of resources or certain essential materials. There is no country in the world including the U.S.A and the U.K, which has all the resources it requires. At the same time, there are some countries like Indonesia, which have been blessed by nature with some rare materials like rubber and tin. International trade ensures equal access to raw materials for all countries.
An important advantage of international trade or the effect of it is the tendency of internationally traded goods to have the same price everywhere. A commodity is cheap or costly depending upon its supply. It will be cheap in a country where it is produced with excessive supply of some essential factors; it will be expensive in that country where it cannot be produced or where it can be produced only at a higher cost. Through international trade, supply is increased in the importing country and thereby the price is reduced. In this way there is a tendency for equalization of prices of all internationally traded goods.
Other benefits of international trade include increased efficiency in production and also to participate in global economy. Encouraging increase in foreign direct investment, the amount of money individuals invest in foreign companies. These factors help in increased employment rate and lead to the growth of gross domestic product (GDP)
Topic: commodities, commodity, comparative advantages, excessive supply, hydroelectric power, importing country, international specialization, international trade, rare materials, raw materials