Advantages of International Trade

Advantages of international trade

One of the key advantages of international trade is gains of trade based on comparative advantage. Comparative advantage states that countries should specialise in the goods and services of which they are comparatively better at producing (Begg and Ward 2004). A country has comparative advantage over another in the production of a good if it can product it at a lower opportunity cost (Sloman and Hinde 2007). It normally arises from an abundance of a particular factor resource, e.g. France is good at wine because of its abundance in productive land and climate.

For example, the production possibilities of 2 countries are as follows:

Country Wheat Cloth

A 2 1

B 4 8

Assume, pre-trade exchange ratio of wheat for cloth are

Country A: 2 wheat for 1 cloth

Country B: 1 wheat for 2 cloth

Country A gains by exporting wheat and importing cloth. Country B gains by exporting cloth and importing wheat. Thus both countries have gained from trade. Gains of trade between the 2 countries need not be equal as it depends on the relative prices of wheat and cloth after trade takes place.

Terms of trade is defined as the price