The gains from specialization and trade are based on comparative advantage, which reflects the relative opportunity cost. When countries specialize in producing goods and services for which they have comparative advantages, total production in the global economy rises. Trade advocates argue that this increase in the size of the economic pie can be used to make all trading countries better off through international trade. Economists also use the principle of comparative advantage to advocate free trade among countries as a better policy. Trade is not based on absolute advantages countries have but the relative (comparative) advantage.
- Does free trade contribute to the improvement of economic well-being?
- Who gains and who loses from free trade among countries, and how do the gains compare to the losses? Explain using examples.
- Do you think the USA export and import of goods and services are based on the principle of a comparative advantage of trade? Explain.