Q. Why should countries engage in international trade or business?

Q. Why should a country import commodities?

Q. Why should a country export commodities?
A country will import commodities or products which it cannot produce or if produce cost would be
high.
A country will export commodities that it can produce in at a cheaper cost.
1. Absolute Advantage Theory of Adam Smith or Theory of Absolute Advantage
Absolute advantage refers that a country can produce more product than another country, a country
will have absolute advantage if it can produce more product than other country at cheaper cost and
the other country should produce the product at a higher cost than other country. If a country has the
absolute advantage in the production of a product, the country will be expertise or efficient in the
production of that product and the people of the country will be efficient in the production of that
product. The concept of absolute advantage is that the production cost of a product by a country will
be lower than that of other country and the country will be efficient in the production of that product
and the capacity of producing the product will increase. This scenario is known as absolute
advantage.
Suppose Bangladeshi people can produce garments at a lower cost than that of UK people and UK
people or the people of United Kingdom can produce food (pizza, burger etc.) at a lower cost than
that of Bangladeshi people.
Suppose a Bangladeshi labor can produce 20 units of garments and an UK people can produce 12
units of garments.
On the other hand an UK people can produce 30 units of food (pizza, burger etc.) and a Bangladeshi people
can produce 15 units of food (pizza and burger etc.)
Country Garments (unit) Foods (unit)
Bangladesh 20 15
United Kingdom 12 30
Total 32 45
(Bangladesh would get absolute advantage on garments products and UK would get absolute
advantage on foods product.)
Country Garments (unit) Foods (unit) Country Garments (unit) Foods (unit)
Bangladesh 20+20=40 Bangladesh
UK UK 30+30=60
Total 40 Total 60
(In these cases, here production increases as well as consumptions also increases, which imply
development occurs. According to Adam Smith if the country which has relative advantage produces
the product then production and consumptions increase which implies development occurs and
increases the efficiency. If Bangladeshi people would not produce foods and UK people would not
produce garments then both the countries would import and export the products.)
2. Comparative Advantage Theory of David Ricardo or Theory of Comparative Advantage
Country Garments (unit) Foods (unit) Country Garments (unit) Foods (unit)
Bangladesh 20 10 Bangladesh 20 10
UK 12 8 UK 12 5
Ration 5:3 5:4 Total 1.67:1 2:1

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(Here same country would get absolute advantage on the both products, but the ratio would be
different i.e. the country would get more absolute advantage on one product than the other product
and vice versa. In the production of garments the ratio is 5:3 or 1.67:1 and in the production of foods
the ratio is 5:4 or 2:1. In the first scenario Bangladesh gets more advantage on Garments and in the
second scenario Bangladesh gets more advantage on Foods.)
According to comparative advantage theory of David Ricardo a country will produce the product
where the comparative disadvantage is lower.
3. Factor Model of Heckscher-Ohlin
Factor Model is identified by Heckscher-Ohlin. This theory is also known as 2x2x2 Theory i.e. there
are two countries (exporting and importing country), two products and two factors of productions
(capital and labor).
A country is called capital abundant country if it has more capital. A country is called labor abundant
country if it has sufficient labor at a cheaper cost. A product is called capital intensive product if
more capital is required to produce the product. On the other hand a product is called labor intensive
product if the product can be produced at a cheaper cost.
HO theory argues that a capital intensive country will produce capital intensive product and export it.
A labor intensive country will produce labor intensive product and will export it. For example:
Bangladesh is labor abundant country because labors are available at a cheaper cost. On the other
hand Japan is capital intensive country (e.g. Toyota) because per capita income is higher.
Different Patterns of International Business or Modes of International Business
International business is known as global business. The people of one country may consume foreign
goods, if the country is not able to produce that good. On the other hand a country can produce a
particular product sufficiently a lower cost and then export it. A business firm may engage in
purchasing product from abroad to sell them in the local market to make profit. In the same way a
firm can export particular product to overseas or foreign counties purchasing them from local
market, such activities are known as international businesses. In the same way a firm can produce a
product to sell them abroad to make profit; this is also like the international business. It can be
defined as the transfer of commodities, goods, products, and services to other nations or to the people
outside the country. The flow of commodities over the boundary of the country is known as
international business. (Trade is one of the channels of business; the scope of business is broader
than that of trade. Trade means buy from one hand and sell to other hand for the purpose of profit,
but business is a whole process from production to consumption.)
Types or Modes of International Business
1. International Trade
2. Licensing
3. Franchising
4. Joint Venture
5. Acquisition of Foreign Assets
6. Establishing subsidiaries at Abroad.

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