Question

Explain the economist’s distinction, in discussion of the compensation principle, between “potential” gains from trade and “actual” gains from trade. Why are the gains only “potential” when that word is used?

Answer 1

When trade is done following the principles of comparative advantage there is an overall gain from trade which stems out from the compensation principle. Accordingly trade provides the means which helps the nation to have at least some people better off and no one worse off. This helps the society to gain from trade. Because the consumption after trade is potentially increased we believe that the quantities of both the goods, one which is specialised and produced and one which is imported, both are sufficient to compensate any losers and there is still some amount of both the goods leftover. Even when there is no compensation made to the losers there are still gains from trade in the potential sense that because of trade it has become possible to have gainers and no losers.