Question

Trade theories shows that:

A. There should be trading opportunities in every country on earth
B. Trade will only occur when there is an absolute advantage
C. Governments play no role in creating trade advantages
D. Once established, trade advantages are permanent

Answer 1

Even if one country has an absolute advantage in all goods, it can still benefit from trade by focusing on its comparative advantages. Trade is beneficial when countries specialize based on lower opportunity costs and exchange goods, leading to greater overall efficiency and mutual gains.

Step-by-step explanation:

International trade theories suggest that even if a high-income country has an absolute advantage in the production of all goods, there can still be beneficial trade through the comparative advantage. When a country specializes in the production of goods for which it has a comparative advantage, it can trade with other countries to mutual benefit. This is because the gains from trade are not rooted in the absolute efficiency of production but rather in the differing opportunity costs between countries. The theory of comparative advantage demonstrates that it's more efficient for countries to specialize and trade accordingly.

Specialization allows countries to produce more efficiently and to trade excess production for goods that other countries have a comparative advantage in producing. Hence, even a country that is more productive overall can still gain from trading with countries that are less productive but have a lower opportunity cost in the production of certain goods. This concept of comparative advantage, elucidated by economist David Ricardo, remains fundamental to contemporary trade theories.