Comparative Advantage and Trade

Benefits of Trade

The benefits of trade include specialization and the ability to obtain needed resources, which can increase a country's overall level of output.

The benefits of trade derive from the ability of producers to specialize. When a producer specializes in a single good or service, they invest in technologies that produce the good or service more efficiently. This allows them to maximize production. With many producers specializing in different goods and services, a large variety of goods and services is available to consumers. Competition may arise as producers attempt to offer their good or service for the lowest price. In addition, producers can obtain the raw materials they need to produce goods through trade. Finally, trade among countries disincentivizes conflict because the trading countries depend on each other for resources.

In most situations specialization can increase a country's overall level of output. One example of this is the United Arab Emirates. The economy of this country centers on oil and natural gas exports. Because the energy industry is a large portion of its economy, the United Arab Emirates invests in the energy industry's infrastructure and increases revenue through arranging beneficial trade deals because other countries, such as the United States, need to import oil and gas. Increased output can then be traded in mutually beneficial ways for all parties involved. However, there is rarely if ever an optimal solution for trade negotiations. Political compromises and the unequal power of trade partners affect trade agreements. Therefore, the outcome of such negotiations depends mostly on whatever power structures exist in the negotiating countries and the power differentials between them. Trade must always account for the influence of global relations. Additionally, each party wants to achieve the most beneficial agreement in order to maximize revenues, which complicates negotiations. Countries that produce oil or other in-demand resources often experience the political benefits from other countries in power who need these resources. Through having a resource many large economies do not possess naturally (such as oil), these countries hold a powerful seat at the negotiation table.
Engaging in trade allows participants to gain many benefits, such as specialization, which allows producers to offer a variety of goods to consumers and invest in new technology. Trade results in abstract benefits as well, such as information and culture exchange.
It is also important to understand that even when both trade partners in a relationship are, as a whole, better off because of the trade relationship, this does not mean that every individual citizen of each country is better off. If the United Arab Emirates decides that its citizens are only allowed to produce oil, diamond exporters and other industries will suffer. By choosing specialization as a trade strategy, the United Arab Emirates also puts the country's economy at risk if oil supplies are depleted or the industry's outlook worsens.

Theoretical situations in economics are simple, but in reality there are always many other factors at play and many people involved. This means that the processes that underlie a comparative advantage and the decisions that are part of the process are more complex than the given examples express. A country could manufacture only shoes and do it incredibly inexpensively, but if it does not have positive political relationships with any other country, it will not be very successful at fostering positive trade relationships. However, comparative advantage is useful in understanding basic ideas about trade.