Chapter Twenty-Two: International Trade
Trade allows us to specialize in doing what we do best. The gain from trade is based on comparative advantage and not on absolute advantage. When each person specializes in producing the good for which he/she has a comparative advantage, total production in the economy rises. This increase in the overall size of the economic pie can be used to make everyone better off.
Remember that comparative advantage reflects the relative opportunity cost. Trade can benefit everyone in society because it allows people to specialize in activities in which they have the comparative advantage. This implies that the gains from trade can be tremendous.
If you consider how the global or international market can really support comparative advantages, it is easy to see why international trade tends to continually flourish. In fact, most economies are interdependent on the other economies around the world.
Today, it is common for any particular good to be produced by the country that has the smaller opportunity cost for producing it. This is because this will always strengthen the economy in general by allowing all participants to benefit from their trade activities.
For example, the farmer gets 5 ounces of meat in exchange for 15 ounces of potatoes. In other words, the farmer buys each ounce of meat for a price of 3 ounces of potatoes. This price of meat is lower than its opportunity cost for 1 ounce of meat which is 4 ounce of potatoes. Thus, the farmer benefits from the trade.
Overall, international trade has quickly become an easily accessible form of making money, thanks to technological advances and the many modes of communication.
Infrastructure is an important consideration in economic patterns and activities, as well. If the right level of technology, communication and transportation are not available, then different businesses will not be able to locate to a particular region. For instance, manufacturing requires that there be a highly developed transportation network to ensure a steady supply of raw materials and easy shipment of completed products.
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