It refers to concentration of a country’s resources on a particular product or few products. Countries specialize on the basis of absolute advantage or comparative advantage.
1. Absolute Advantage
It refers to the possession of certain advantages (lower labour costs, plentiful supplies of raw materials etc) by a country which enable it to produce a product more cheaply than other countries. South Africa for gold, Sri Lanka for tea bags etc.
2. Comparative Advantage
It refers to the possession of certain advantages (lower costs and prices, innovative products etc) by a country which enable it to produce a product at a lower opportunity cost than other countries.
Countries specialize in one product or few products and take part in international trade for various reasons.
Reasons for International Trade
- It makes foreign goods available
- It provides a market for surplus products
- It leads to better allocation of resources
- It brings in the advantage of International Specialization
- It enables transfer of technology from developed countries to developing countries
- It creates employment opportunities in export related industries
- It promotes friendship and cooperation among countries
- It brings fame and prestige
Case against International Trade
- There is the danger of overspecialization
- Foreign competition kills domestic infant firms
- It worsens the Balance of Payments position if exports are less than imports
- Developed countries may follow dumping
- It makes harmful goods available
- It may lead to the imposition of foreign cultures