Globalization is a result of economies of scale, which is the cost advantage that arises with increased output of a product. Economies of scale arise because of the inverse relationship between the quantity produced and per-unit fixed costs; i.e. the greater the quantity of a good produced, the lower the per-unit fixed cost because these costs are spread out over a larger number of goods.

Economies of scale may also reduce variable costs per unit because of operational efficiencies and synergies. Economies of scale can be classified into two main types: Internal – arising from within the company; External – arising from extraneous factors such as industry size.

This explains why countries produce what they produce, why certain services thrive in certain areas, and why international trade allows us to get as close to economic equilibrium as possible.

Take rival markets China and the US for example, China produces various types of clothing, Medical and technical equipment, Plastics, Vehicles, Iron or steel products, and Footwear. While the United States’ top exports are Machinery, electronic equipment, aircrafts, and vehicles.

Although there are some similarities due to geographic differences, the US and China have different exports because they have different comparative advantages in producing certain products. China has a comparative advantage in producing clothing because labour and textiles are cheaper there, while the US has a comparative advantage in producing aircrafts because they have a more robust technology sector.

Getting back to how this all affects the average person’s life: If the US were to produce it’s own clothing, which it does not have a comparative advantage in, clothing prices in the US would be much higher than they are now because we wouldn’t be able to purchase Chinese products without international trade.

Conversely, China would have an extremely difficult time accessing aircrafts because the cost to them would be astronomical, given that their comparative advantage lies in producing clothing.

Because we have globalization, we are able to produce the goods that our geographic location and market structures allow us to have a competitive advantage in, and then ship those products out to the rest of the world – in hindsight, everybody wins, especially the average person.

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