Explain the Gains from Trade and the Implications for Trade Negotiations

Topics: Economics, International trade, Comparative advantage Pages: 3 (1175 words) Published: December 8, 2012
Explain the gains from trade and the implications for trade negotiations Trade is the transfer of goods and services from one person or entity to another in return for something in exchange from the buyer. The fundamental force that drives trade is David Ricardo’s law of comparative advantage; that is, the ability of an individual or group to carry out a particular economic activity (such as making a specific product) more efficiently than another activity. One country cannot have a comparative advantage in all goods, as having a comparative advantage in one good automatically means that the country will have a comparative disadvantage in another. International trade allows countries to develop comparative advantages that they have created, which will have been largely determined by underlying resources and capabilities. The first gain in trade is the greater variety of available goods for consumption. Without trade, an economy can consume only what it produces – its consumption possibilities frontier (CPF – the limit to what a country’s citizens can consume) is the same as its production possibilities frontier (PPF – the representation of an outcome or production combination that can be produced with a given amount of resources). Trade brings in different varieties of particular products from different destinations. This gives consumers wider arrays of choices which will satisfy the tremendous diversity in tastes in the marketplace. Secondly, there will be more efficient allocation and better utilization of resources since countries tend to produce goods in which they have a comparative advantage. When countries produce through comparative advantage, and import goods in which they only have a comparative disadvantage, wasteful duplication of resources is prevented; thus reducing pollution and concentrating on creating goods which are the most valuable to them. Furthermore, trade promotes efficiency in production as countries will try to adopt better methods...
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