What is the economic basis for trade? Follow

Basis:

A basis is generally defined as the difference between the real cost of the product or commodity in a cash maker and the cost of its future related contracts. This means that every time the contract expires the price will be changing from time to time. This will help in reducing the gap between the associated person of product or commodity and the future contractor. As time passed, the way of trading also changed and in the modern era, the updated version of trading is used throughout the world.

Need for trade:

Trade allows the nation to produce products beyond their capacity as every product cannot be produced in every country as it requires huge manpower, budget, resources, climatic conditions, etc. Instead of focusing on producing all products they prefer to produce one product which is of high quality and service. Using such products, they trade for other products to have a better way of living with all resources in sufficient amount.

The basis for trade between two economic countries is done in two concepts which are a comparative advantage and economic advantage.

Comparative Advantage:

It is defined as when two nations are trading products or commodities between them and the nation produces a product with low cost, better quality and in less time. In this principle of trading, the comparison of products will be done within the nation and the product with low cost will be preferred. The preferred product produced by that nation after comparison will be traded between the nations at low cost.

Example: Suppose India is able to produce cotton at a better cost and in less time than Dubai and imports oil to produce cotton from Dubai as it saves time to produce more cotton and this is beneficial to both of the economic nations which are frequently done on a trade basis.

Absolute Advantage:

Absolute Advantage is a theory in which a country produces a greater quantity of the product with similar resources available at a lesser time. If two countries trade products which they have an absolute advantage, then it will be beneficial for both. It means the number of goods or service is greater than the competitors, using the same amount of resources others used.

Example:  For example, England produces a unit of cloth at a much lesser time and cost than compared to Portugal. On the other hand, Portugal produces more quantity of wine in less time as compared to England. So if the 2 nations trade products which they have an absolute advantage in, then it will be beneficial for both of them as they will be saving both time and cost.