Question

Explain the definition of exports and imports. How does comparative advantage relate to international trade? Who are the winners and losers from international trade?

Answer 1

Exports refer to the sale of goods and services from domestic economy to the rest of the world. Whereas Imports refers to the purchase of goods and services by domestic economy from the rest of the world.

Comparative Advantage which was introduced by David Ricardo postulates that one country should export the good in which it has a comparative advantage (or service in which it has a comparative advantage) and import the good or service in which it has a comparative disadvantage. By this theory the country can have comparative advantage in only one of the goods in a two good world and can never have comparative advantage in all; the goods and that is the crux of the word "comparative" which distinguishes it from Absolute advantage posed by Adam Smith.

In a situation of free trade which is rarely applicable today, but was assumed by Ricardo when he posed the theory, both the countries engaging in trade by exporting and importing become better off compared to the situation of no trade. This is logical because even when they are open to trade they still have the option not to trade but when they are closed they no longer have the choice to trade. Thus trade offers more opportunities and raises standard of living for the economy as a whole although within the economy particular sections of people might gain or lose. For example those employed in the export sector gain and those in import sector lose.