International Trade – Specialization

International trade - specialization


“International trade is the exchange of capital, goods and services across international boundaries or territories.” (Boundless Economics)

Nations can benefit from international trade when they specialize in producing goods or services where they have comparative advantage and exchange domestically produced goods for other foreign produced goods. Technological advances have made it easier now to coordinate trade as there been a fall in trade barriers between nations.

Even if one country is more efficient in the production of all goods or services (Absolute Advantage in all goods/services) than another, both nations will still benefit by trading with each other. Countries benefit by importing if the opportunity cost of same is lower than the cost of producing them domestically.

Specialization under the law of Comparative Advantage will result in the efficient allocation of world resources and an improvement in production techniques. Counties specialize in producing certain products and then trade for other goods/services rather than producing all of them for consumption in the domestic economy. They produce a surplus in the specialized good and then trade that surplus with the surplus product in another country.

Absolute Advantage/Comparative Advantage

Absolute Advantage refers to the differences in the productivity of countries. More specifically, it is the ability to produce a product or service more efficiently than another country. It can produce a good or service with a lower marginal cost( fewer inputs: raw materials, less time and with fewer workers).

Comparative Advantage is the ability of a party to produce a particular good or service at a lower opportunity or marginal cost over another party. It is the driving force of specialization and trade.

If there is no trade between both nations, each country will consume what it produces.