Did you know?
- Trade allows a country to specialise in the production of those products that it can produce most efficiently. A country will benefit from international trade as long as it exports goods for which it forgoes less other goods than other countries, and imports goods in which it has a higher opportunity cost of production than other countries.
In this section we look at how the theories of absolute and comparative advantage help explain the benefits of trade to a country, and to the World.
International trade is based on specialisation at a national level.
According to economic theory a country could benefit from trade if it specialises in the production of goods in which it has an absolute or comparative advantage (see below).
Theory of Absolute advantage
According to Adam Smith (1723-1790), each country should concentrate on producing those goods in which it has an absolute advantage.
Absolute advantage exists when a country can produce more of a product per resource unit than another country. It is a possible basis for trade. A country with an absolute advantage is producing more efficiently (at a lower cost per unit) than another.
Benefits of specialisation and trade:
- Consumers in each country can buy a wider range of goods at lower prices leading to a better standard of living
- There is a more efficient allocation of resources. i.e. better use of scarce resources
- More goods are produced in the World and more goods are available for consumption.