Baumol and Blinder offer some reasons why countries trade with each other. List three of the reasons, and give an example of each to illustrate the reason.
What will be an ideal response?
The three reasons are:1. Every country lacks some other vital resources that it can get only by trading with others. The example used in the text was Persian Gulf states, with oil but little farm land.2. Each country’s climate, labor force, and other endowments make it a relatively efficient producer of some goods and an inefficient producer of other goods. Examples included U.S. attempts to grow bananas and coffee, rather than growing them in Honduras and Brazil; U.S. growing corn, rather than attempting to do so in Switzerland; and New Zealand employing labor skilled in agriculture, while Japan employs labor skilled in manufacturing.3. Specialization permits larger outputs and can therefore offer economies of large-scale production. If several countries specialize, they can trade among themselves and offer low-cost items.Considering all of these, one can conclude that trade is essential for the prosperity of the trading nations.
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