Question

Is trade in the United States politically driven or is it based on comparative and absolute advantage?

Answer 1

Trade in US is based on Comparative Advantage

• A country has a comparative advantage over another when it can produce a good or service at a lower opportunity cost.
• Countries benefit when they specialize in producing goods for which they have a comparative advantage and engage in trade for other goods.
• International trade is the exchange of capital, goods, and services across international borders or territories. Trading-partners reap mutual gains when each nation specializes in goods for which it holds a comparative advantage and then engages in trade for other products. In other words, each nation should produce goods for which its domestic opportunity costs are lower than the domestic opportunity costs of other nations and exchange those goods for products that have higher domestic opportunity costs compared to other nations.
• In the United States, Specialization results in a more efficient allocation of world resources. Larger outputs of both products become available to both nations. The outcome of international specialization and trade is equivalent to a nation having more and/or better resources or discovering improved production techniques.
• Comparative advantage drives countries to specialize in the production of the goods for which they have the lowest opportunity cost, which leads to increased productivity.