The Gain From Trade

In the world, each country has its own unique set of resources; these resources include the raw materials in the land, human capital and technology. Because of these distinct constraints, each country has its own advantage in producing or creating certain goods and services, compared to other countries. These advantages are created by specialization and over time, this specialization lets a country develop certain goods or services at the lowest costs possible. If each country in turn focuses on producing a good or service at their lowest opportunity cost and trades the excess production for another country’s lowest opportunity cost good or service, then the total amount of consumable goods or services in all countries will have increased. In an eggshell, by having each country in the world specialize in their own particular areas of expertise, or lowest opportunity cost sector, and trading the surplus production to other countries for those country’s specialized products and services, each country involved will not only enjoy the lowest priced goods and services, they can realize an increase in the mutually combined output of all the countries.

If countries in the world did not trade and instead tried to produce all the products it required internally, in many cases, certain products or services would not be available or only obtainable for a much higher cost. For example, in agriculture, certain vegetables and fruits will only grow under a particular temperature in a certain type of soil. Some countries in the world do not have the fortune to have land which is lush for all types of agricultural goods. Perhaps Jamaica has many highlands great for coffee cultivation. Unfortunately, Jamaica is an island which does not have much land for grazing cattle. In this case, if Jamaica did not trade, and it tried to produce everything it needed for itself, it would be left in a situation where it may have just enough coffee for the people, but a striking lack of cattle it people demand.

In Jamaica’s case, if instead they focus on trading, and specialize all their efforts in coffee production, Jamaica would have a surplus of coffee beans it can use to trade for the cattle or other types of goods and services it needs from countries, which are also specializing and trading with the lowest opportunity cost in mind. The lowest opportunity cost for a country is referencing the comparative advantage one country has over another country when producing the same good or service. When two or more countries can produce the same good or service for consumption, but one country can produce that good or service more economically, then that country who produces the cheapest is said to have the lowest opportunity cost in producing that product or service. The country with the lowest opportunity cost in producing a certain good or service is also the one with the comparative advantage. In economics, it is logical to say that if all countries are producing products and services in which they have a comparative advantage, and trading these goods and services with other countries that are doing the same, the international markets would be working in its most efficient manner.

Ultimately, the gains from trade are three-fold. First, trade allows for the products and services that are abundant in one location to be supplied to areas that is scarce or lacking. Another gain from trade involves the concept of comparative advantage. Because countries are producing goods and services which are lowest opportunity costs for them, the world consumer will be able to enjoy the lowest costs for those goods and services. Finally, the gains from trade involve a mutual increase in the total output of production in goods or services in all countries. With each country focusing on making the goods and services with the lowest opportunity cost, they generally can make much more of it, which allows for the surplus to be traded abroad and also augments the consumption of that product or service by the people demanding it.