Why do countries trade with each other? What would happen if countries curtailed or did not trade with each other? Select a theory discussed in chapter 2, and discuss how it explains why it is beneficial for a country to engage in international trade. Theory I selected a theory of international trade that supports the premise that a nation could only gain from trade if it had a trade surplus

Countries engage in international trade for various reasons. One of the main motivations behind international trade is the concept of comparative advantage, which lies at the core of classical and neoclassical economic theories. Comparative advantage suggests that countries should focus on producing and exporting goods and services in which they have a lower opportunity cost compared to other countries, while importing goods and services in which they have a higher opportunity cost.

In his seminal work, David Ricardo developed the theory of comparative advantage in the early 19th century. Ricardo argued that even if one country has an absolute advantage in the production of all goods, both countries could still benefit from trade if they have different relative efficiencies in producing those goods. By specializing in the production of the goods in which they have a comparative advantage, countries can increase overall production and consumption, leading to higher levels of economic welfare.

The theory of comparative advantage can be explained through a hypothetical example. Let’s consider a situation where Country A and Country B both produce two goods: wheat and cloth. Country A can produce 10 units of wheat or 5 units of cloth per hour, while Country B can produce 6 units of wheat or 3 units of cloth per hour. In this case, Country A has an absolute advantage in the production of both goods, as it can produce more of both goods per hour. However, if Country A specializes in the production of wheat and Country B specializes in the production of cloth, they can both benefit from trade.

Assuming that the countries allocate their resources efficiently, Country A could produce 20 units of wheat and no cloth, while Country B could produce 9 units of cloth and no wheat. If they decide to trade, Country A could export 10 units of wheat to Country B in exchange for 4 units of cloth. This way, both countries end up with more of both goods compared to their respective production levels in the absence of trade. Country A now has 10 units of wheat and 4 units of cloth, while Country B has 10 units of wheat and 5 units of cloth. Both countries have increased their consumption possibilities by specializing in the production of goods in which they have a comparative advantage and engaging in trade.

In this example, the theory of comparative advantage explains why it is beneficial for countries to engage in international trade. Despite having an absolute advantage in the production of both goods, Country A benefits from specializing in the production of wheat and trading for cloth, as it can obtain cloth at a lower opportunity cost compared to producing it domestically. Similarly, Country B benefits from specializing in the production of cloth and trading for wheat, as it can obtain wheat at a lower opportunity cost. By focusing on their comparative advantages, countries can expand the overall production possibilities and achieve higher levels of economic welfare through trade.

If countries curtailed or did not engage in international trade, several consequences could arise. Firstly, countries would not be able to benefit from the gains of specialization and the division of labor. Each country would have to produce all the goods and services needed domestically, which may lead to inefficiencies and lower overall productivity. Additionally, countries would miss out on the potential gains from comparative advantage and the access to a wider variety of goods and services offered by international trade. This could result in higher costs and reduced choices for consumers. Moreover, the lack of trade could hinder technological advancements and innovations, as the exchange of ideas and knowledge through trade can facilitate the transfer of technology between countries.

To summarize, the theory of comparative advantage provides a compelling explanation of the benefits of international trade for countries. By specializing in the production of goods and services in which they have a lower opportunity cost, countries can increase their overall production and consumption levels, leading to higher economic welfare. Without trade, countries would miss out on the gains from specialization, comparative advantage, and the access to a wider variety of goods and services. International trade plays a crucial role in promoting economic growth, efficiency, and the advancement of technology.