Question

What is an important insight of international trade theory regarding when two countries engage in voluntary trade? Explain your answer.

Answer 1

An important insight of international trade theory is that it is almost always beneficial to both countries when two countries engage in voluntary trade. Both countries will be better off if each specialises in the industry where it has a comparative advantage, and if the two trade with one another. Specialisation increases world output. Suppose that East specialises in wheat growing, shifting ten workers from its bicycle factories to its fields, and producing 240 bushels and 80 bikes. West moves 25 workers from wheat farming into bike making, where its comparative advantage lies, and produces 75 bikes and 25 bushels. Global production rises.