Final answer:
The theory of comparative advantage describes how countries gain from trading goods in which they hold a lower opportunity cost, while trade liberalisation can put local industries at risk, which may lead to the implementation of protectionist policies. Intra-industry trade, which occurs between similar economies and cannot be fully explained by comparative advantage, is an example of the complex nature of international trade patterns.
Step-by-step explanation:
The Theory of Comparative Advantage
The economic theory of comparative advantage describes how countries benefit from specializing in and exporting goods for which they have a lower opportunity cost of production relative to other nations. By doing so, nations are able to enjoy gains from international trade. Put simply, comparative advantage suggests that even if a country can produce everything more efficiently than another country (which would be an absolute advantage), it still benefits from focusing on its most efficient productions and then trading with others for the rest of what it needs.
Risks of Trade Liberalisation and Protectionist Trade Policies
While trade liberalization can lead to an overall increase in efficiency and economic welfare, it may also pose risks to local industries. These industries might find it hard to compete with imported goods, potentially leading to job losses and economic decline in certain sectors. To support the development of domestic manufacturing sectors, governments might implement protectionist trade policies, such as tariffs, quotas, or subsidies. These measures can provide temporary relief and help local industries adjust and become competitive in the international market.
Intra-Industry Trade
The prevalence of intra-industry trade - trade between countries of goods within the same industry - suggests that the theory of comparative advantage does not fully explain all trade patterns. This type of trade, exemplified by countries like the United States which exports and imports autos, can be explained by factors such as economies of scale, product differentiation, and consumer preferences for a variety of goods.