Gains from Trade

How does trade make people better off?

Summary

We live in a world in which people and nations are economically interdependent. Such interdependence comes about as a result of specialization and trade. The benefits of trade can be seen in increased wealth and a higher standard of living for society as a whole.

How does specialization lead to economic interdependence? When people specialize, the resulting division of labor increases productivity. However, those who specialize must trade to obtain what they do not make themselves. This trade gives rise to economic interdependence, as people come to depend on one another for goods and services.

How do people and nations gain from specialization and trade? The principle of comparative advantage is what enables producers to gain from specialization and trade. By producing goods or services that have the lowest opportunity cost and then trading, people and nations end up being more efficient and productive.

How does trade make us wealthier? Trade makes societies wealthier by moving goods to people who value them the most. Trade also increases the quantity and variety of goods and lowers the cost of goods.