This lesson explains why nations trade even when they could produce some goods themselves. It introduces absolute and comparative advantage and shows how these ideas connect to free trade.
Countries do not have equal access to natural resources, climates, technologies, or skills. For example, the United States does not have the climate needed to grow coffee beans, while another country may be especially well suited to producing them. Countries also differ in how efficiently they can make manufactured goods or provide services.
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Why do nations specialize and trade?
Nations differ in resources, climate, technology, skills, and production costs. Specialization lets each focus on goods or services it can produce especially well and trade for what it needs.
What is absolute advantage?
A country has an absolute advantage when it can produce and sell a product at a lower cost than any other country, or when it is the only country that can provide it.
What is comparative advantage?
Comparative advantage is the ability to produce certain goods most readily and cheaply relative to a country's other production possibilities. It explains why specialization and trade can benefit countries.
What is free trade?
Free trade is a policy that allows people and businesses in a country to buy and sell across borders without government restrictions.
How does protectionism differ from free trade?
Protectionism shields domestic industries from foreign competition through barriers such as tariffs and quotas. Free trade allows cross-border buying and selling with fewer such restrictions.
Quiz questions
Why might workers be concerned about imports and international competition?Answer: Competition can displace some workers or put pressure on wages.
What does outsourcing mean in business?Answer: Having work or business functions performed by an outside provider.
How can an open economy encourage innovation?Answer: It can bring in ideas, knowledge, and approaches from abroad.
How can foreign investment support economic development in lower-income countries?Answer: Foreign capital and technology can help build productive capacity.
What should a balanced assessment of global trade consider?Answer: Who gains from trade, who bears its costs, and how affected people can be supported.
Based on Introduction to Business 2e by Lawrence J. Gitman, Carl McDaniel, Amit Shah, Monique Reece, Linda Koffel, Bethann Talsma, James C. Hyatt (OpenStax), licensed CC BY 4.0. Adapted into a summary, flashcards and quizzes.