Why countries trade

This chapter begins with an example of why trade among regions of a country is similar to international trade. An example of international trade in one product is given to show how imports and exports happen. The reasons for international trade in terms both of absolute and comparative advantage are then explained. The reasoning that trade is ultimately based on differences in opportunity cost is shown. A final section covers the dynamic gains from trade that occur over time and are not captured in the traditional models of comparative advantage. This chapter starts with an example of why trade among regions of a country is similar to international trade. For more than 200 years, economists have tried to convince the public and policy makers that countries trade for the same reason that individuals do. All countries can benefit if each country specializes in producing those goods that it can produce best and satisfy their other wants and needs by trading for them. The chapter shows how international trade is not like a poker game where one person's gain is another person's loss. Rather, in international trade all countries gain and are better off than they would be if they pursued the alternative: buying and selling goods restricted to their own domestic markets. Goods tend to move from where they can be produced relatively cheaply to where they can be sold at a relatively higher price. This is true for both interregional and international trade.