What Are The Sources Of International Trade In Goods And Services?

Nations find it beneficial to participate in international trade for several reasons: because of diversity in the conditions of production, because of decreasing costs of production, and because of differences in tastes among nations.

Trade may take place because of the diversity in productive possibilities among countries. In part, these differences reflect endowments of natural resources. One country may be blessed with a supply of petroleum while another may have a large amount of fertile land.
A second cause of trade lies in preferences. Even if the conditions of production were identical in all regions, countries might engage in trade if their tastes for goods were different.
Perhaps the most important reason for trade is differences among countries in production costs. For example, manufacturing processes enjoy economies of scale; that is they tend to have lower average costs of production as the volume of output expands. So when a particular country gets a head start in particular product, it can become the high volume low cost producer. The economies of scale give it a significant cost and technological advantage over other countries, which find it cheaper to buy from the leading producer than to make the product they.