Chapter 32, Problem 32.1LO

To determine

Reasons behind Gains from trade.

Answer to Problem 32.1LO

• Gains from specialization: Economies of scale is an advantage that the country receives from specialization. With more and more production, the average cost of production decreases and total output increases.

• Gains from trade: Two countries trade with each other only when they find it to be mutually beneficial. The benefits the country receives through more production and consumption of goods because of specialization of production and international trade is known as Gains from trade. A country specializes in a production process due to absolute or comparative cost advantage.

Explanation of Solution

Adam Smith mentioned that Gains from trade arises due to absolute advantage in the cost of production. David Ricardo mentions that a country may have absolute cost advantage but international trade should depend on comparative cost advantage. It is a concept by which we can compare two countries and say which country can produce the commodity more efficiently. The country/economy producing a commodity at a lower opportunity cost can produce it more efficiently. Thus gain from trade can arise from cost advantage in importing the product over domestic production.

Economics Concept Introduction

Introduction:

International Trade: Trade between two different countries is known as international trade.

Specialization in production: A country specializes in a production process due to absolute or comparative cost advantage.

Gains from trade: The benefits the country receives through more production and consumption of goods because of specialization of production and international trade is known as Gains from trade.