Lesson 1 of 6 · 13 min
Why countries trade: the benefits
Trade lets each country specialise in what it does relatively cheaply, sell into bigger markets and face more competition, so the world as a whole consumes more than it could in isolation.
In short
- Gains from exchange: exporters get a higher price than at home and importers pay less than it would cost to make the good themselves.
- Comparative advantage: a country gains by specialising in the good with the lowest opportunity cost, even if it is not the cheapest producer of anything in absolute terms.
- Traditional models explain comparative advantage by technology differences (Ricardian) and factor endowment differences (Heckscher-Ohlin).
- Newer models stress economies of scale, greater product variety and more competition, which also explain intra-industry trade between similar countries.
- Trade can raise real GDP through better resource allocation, learning by doing, knowledge spillovers and better institutions.
- Overall welfare rises, but not everyone gains: the winners could compensate the losers and still be better off.
Unlock this lesson free for 7 days
Create a free account to get 7 days of full access — every lesson, video, flashcard, mock and the question bank. No card needed.