Question

Explain the difference between “gains from exchange” and “gains from specialization”.

Answer 1

Answer:-

- Exchange gains shows two traders with different endowments but similar preferences , earn more balanced consumption basket through trade.

-Those two consumers' gain from exchange is the difference between the their willingness to pay and market price(this is also known as consumer surplus).

- Specialisation refers to country's tendency of specialising in one good and trade it to gain a surplus(producer surplus) of the product for another good.

- Gains from Specialisation occurs before gains from exchange.

- Specialisation gains shows producers' side where exchange gain shows consumers' gain.

Total gains from trade is the net benefit from trade which can be decompsed into exchange gain and Specialisation gain. It shows increase in consumer and producer surplus.