Question

Explain how countries gain from international trade.

Answer 1

Gains from trade refer to the net benefits to economic agents from engaging in voluntary trade with each other . Due to free international trade countries enjoy some benefits . Firstly we can say that countries can produce according to their comparative advantage which helps them to utilize resources better , countries trading as per comparative advantage helps them to consume beyond their own production possibility frontier .

Secondly, countries can produce as per abundance of inputs available . As for example a country abundant in labor can produce labor intensive goods and exchange it for capital intensive goods made by others countries who are abundant in capital . This also creates a relative advantage in production .

Thirdly, countries gain from trade by not only exchanging goods and services , they also exchange technology , production pattern , knowledge etc . Free flow of goods and services allows a country to specialize rather than being self sufficient in every thing .