Gains from trade
Topic: International Trade Policy, WTO and Intellectual Property · NCERT: Beyond NCERT
Meaning
Gains from trade are the rise in total consumption and welfare that countries get when they specialise and exchange goods instead of making everything themselves. By specialising in goods where it has a lower opportunity cost (what it gives up to make them), a country can consume at a point outside its own production possibility frontier. This is impossible in autarky, a state of full self-sufficiency with no trade. Trade is therefore positive-sum: both sides can gain.
Example
Ricardo's figures show how this works. One unit of wine costs England 1.2 cloth in forgone output but costs Portugal only 0.89 cloth. So Portugal makes wine and England makes cloth. If they trade at any rate between 0.89 and 1.2 cloth per wine, both countries end up better off.
Don't confuse with
- Stolper-Samuelson theorem: this says trade creates losers inside a country, namely the owners of the scarce factor. The nation can gain overall even while some groups lose.
Related concepts
- Absolute advantage
- Comparative advantage
- Autarky
- Heckscher-Ohlin theory
- Stolper-Samuelson theorem
- Leontief paradox
- Intra-industry trade
- New trade theory
- Gravity model of trade
- Entrepot trade