Explaining Free Trade and Comparative Advantage


One of the main reasons that the world has become richer in the last 20 years is that it has become more productive. As countries, we have become productive because we have learnt to specialize in things we do well, and then to trade with each other.

This is the beauty of “trade” or “exchange”.

In recent months, there has been talk of “global trade wars”. The USA wants to reduce imports from China and Europe.

If they do, China and Europe will reduce imports from the US. But if trade and specialization stops, everybody can be worse off!

Let us demonstrate this with an example:

So in the first case the world is producing 11 shirts and 3 pants. After specialization it is producing 12 shirts and 4 pants. 

Therefore, the world is producing more than before in the same number of hours with specialization!

So the USA could consume 10 shirts and 2 pants, and India could consume 2 shirts and 2 pants.

And therefore, both countries are better off after trading! That is why specialization and trade makes everyone better. This is called the theory of “comparative advantage”.

Let’s hope that everyone sees reason and makes decisions that will be good for all concerned!

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