Why do countries trade with one another, and what are the gains and risks?
Why countries trade, the meaning of imports and exports, the benefits of international trade, and the role of specialisation between countries.
An OCR J205 answer on international trade: why countries trade, imports and exports, the benefits of trade and specialisation between countries, and the risks of relying on trade.
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What this dot point is asking
OCR wants you to explain why countries trade, define imports and exports, set out the benefits of international trade, and explain the role of specialisation between countries. This opens the international section of Component 02.
Why countries trade
Countries trade because no country can produce everything it wants efficiently. By specialising in what it produces best and trading for the rest, a country can enjoy more goods and services than if it tried to make everything itself. This is the international version of specialisation and the division of labour.
The benefits of trade
International trade brings several gains:
- Lower prices and more choice. Consumers can buy goods their own country does not make, and competition from imports keeps prices down.
- Specialisation and efficiency. Countries focus on what they do best, raising total world output.
- Larger markets. Exporters can sell to billions of customers abroad, allowing economies of scale that lower costs.
- Access to resources. Countries can import raw materials and goods they lack (such as oil or certain foods).
- Higher growth and living standards. Trade can raise incomes and spread new technology.
Specialisation between countries
Countries specialise based on their advantages: climate (coffee in Brazil), natural resources (oil in Saudi Arabia), skills and technology (engineering in Germany), or low labour costs. By exporting these specialities and importing other goods, each country gets more than it could alone.
The risks of relying on trade
Trade is generally beneficial, but heavy reliance carries risks:
- Exposure to global shocks. A recession abroad cuts demand for a country's exports, and global supply problems can disrupt imports.
- Over-dependence. Relying on one export or one trading partner is risky if that market weakens.
- Pressure on domestic industries. Cheap imports can undercut home firms, causing job losses in some industries (the case some make for protectionism).
Try this
Q1. Define an export. [2 marks]
- Cue. A good or service sold by a country to other countries (money flows into the country).
Q2. Explain one benefit of international trade for consumers. [3 marks]
- Cue. Trade gives access to goods not made at home and, through import competition, lower prices and more choice.
Exam-style practice questions
Practice questions written in the style of OCR exam questions on this dot point, with worked answer explainers. The year tag is the paper they imitate, not the source.
OCR J205/02 20194 marksExplain two benefits to a country of international trade.Show worked answer →
A 4 mark question worth two marks per developed benefit.
First, trade gives consumers more choice and lower prices: they can buy goods their own country does not make, and competition from imports keeps prices down.
Second, trade lets countries specialise in what they produce best and sell it abroad, raising output and incomes, while importing other goods more cheaply than making them. Markers reward two clearly developed benefits; a bare list without explanation earns fewer marks.
OCR J205/02 20226 marksDiscuss the benefits and risks for a country of relying heavily on international trade.Show worked answer →
A 6 mark evaluative question.
Benefits: trade brings lower prices and more choice, lets countries specialise and exploit economies of scale, gives access to larger markets for exporters, and can raise growth and living standards.
Risks: heavy reliance can leave a country exposed to global shocks (a recession abroad cuts demand for its exports), to supply disruptions, and to unfair competition that can harm domestic industries and jobs. Markers reward both sides and a judgement, for example that trade usually raises living standards but a country should avoid over-dependence on a single export or partner.
Related dot points
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An OCR J205 answer on the balance of payments and current account: the trade balance, surpluses and deficits, and the causes and consequences of a trade imbalance.
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An OCR J205 answer on exchange rates: what an exchange rate is, how to convert between currencies, and how an appreciation or depreciation affects exporters, importers and consumers (the SPICED and WPIDEC effects).
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An OCR J205 answer on free trade and protectionism: free trade agreements including the European Union and trading blocs, the methods of protection (tariffs, quotas and subsidies), and the arguments for and against protectionism.
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An OCR J205 answer on globalisation: what it is and its causes, the role of multinational companies, and the costs and benefits for producers, workers and consumers in developed and less developed countries, including economic, social and environmental sustainability.
- The meaning of economic growth, how it is measured using GDP and GDP per capita, the determinants of growth, and the economic cycle.
An OCR J205 answer on economic growth: its meaning, how it is measured with GDP and GDP per capita, the determinants of growth, and the stages of the economic cycle.
Sources & how we know this
- OCR GCSE (9-1) Economics J205 specification — OCR (2017)