Nations trade because of following reasons:
1. Unequal distribution of natural resources: Resources are unequally distributed in natural resources. Some countries are abundant in one commodity and scarce in other while opposite is true for some other country. It makes a case for international trade and exchanging abundant commodity with scarce commodity by nations.
2. Unequal availability of factors of production: Different nations are endowed with different factors of production which includes land, labour, capital and entrepreneurship. For example, India is a labour abundant country. Therefore, it is advisable for India to produce such commodities which use labour intensive methods and exchange it for those which use capital intensive methods. USA is a capital abundant country. Therefore, nations need to trade.
3. Theory of Comparative Cost Advantage: Due to these factors, some countries are in an advantageous position in producing selected goods and services which other countries cannot produce that effectively and efficiently and vice-versa. Consequently, each country finds it advantageous to produce those selected goods and services that it can produce more effectively at home and importing those goods in which other nations have a comparative cost advantage.
4. Geographical Specialisation: The international business as it exists today is the result of geographical specialisation. Even within a country each state specialises in those goods for which it is geographically more suitable. Similarly, each nation specialises in those goods in which it is specialised as per availability of resources and exchanges it for other goods and services in foreign market. 5. Cost minimization principle of firms: Firms get involved in international business to minimise their costs and maximise their profits.