Economics / Unit 11: International Trade and the Global Economy
11.2 Specialization and Gains from Trade
Notes
- When countries specialize in goods where they have a comparative advantage and trade, total output rises and both can consume more than they could alone.
- Terms of trade must fall between the two countries' opportunity costs for both to gain.
- Worked example (from 11.1): A specializes in shirts and B in computers. They agree to trade 1 computer for 2.5 shirts. B gets 2.5 shirts for each computer, more than the 2 shirts it gives up to make one. A gets a computer for 2.5 shirts, less than the 3 shirts it would give up to make one. Both gain.
- Specialization also happens between people and regions: a doctor hires a plumber even if she could learn plumbing, because her time is worth more practicing medicine.
- Trade lets countries consume combinations outside their own production possibilities frontier.
- Trade creates winners and losers within a country: consumers and exporting industries usually gain, while workers in industries facing new import competition may lose jobs.
Practice
Country A gives up 3 shirts to make a computer, and Country B gives up 2 shirts to make a computer. Which trade price would benefit both countries?
The price must fall between the two opportunity costs of 2 and 3 shirts.
How does specialization and trade allow a country to consume beyond its own PPF?
Trading lets a country get goods at a lower cost than making them itself.
When a country opens to more trade, which group is most likely to be hurt?
Gains from trade are spread widely, but some industries face new competition.
Ready for more? Take the Unit 11 test.