Presentation on theme: "Basis for International Trade. What is trade? Exchange of goods and services between two countries."— Presentation transcript:
Basis for International Trade
What is trade? Exchange of goods and services between two countries
Why Should Countries Trade? Trade is beneficial
Why is Trade Beneficial? Both countries in trade gain from trade
Story of Akshay Kumar & Vinay or Kamal Akshay Kumar can probably sweep his house faster than anyone else. But just because he can sweep his house fast, does this mean he should? Let's say Akshay Kumar can sweep his room in 2 hours while Kamal or Vinay, his servant, can sweep his house in 4 hours.
Because he can sweep his house in less time, Ahshay has an absolute advantage in sweeping house. However, is sweeping his lawn the best use of Akshay Kumar's time? Suppose that in the same 2 hours it takes him to sweep his room, he could film an commercial ad and earn Rs 50 lakhs. Akshay Kumar 's opporunity cost (the value of his next best alternative) of sweeping the lawn is Rs. 50 lakhs.
In contrast, Kamal's next best alternative is to wrap meat at Wegman's where she earns Rs. 20 an hour. So, in the 4 hours it would take him to sweep Akshay Kumar's lawn, he could have earned Rs. 80. Kamal's opportunity cost of sweeping his lawn is Rs.80. Akshay Kumar has an absolute advantage in sweeping house because he can do the work in less time. But, Kamal has a comparative advantage in sweeping house because he has the lower opportunity cost. A person or a country has a comparative advantage when they can produce a good at a lower opportunity cost compared to someone else.
The gains from trade are enormous. Rather than sweeping his lawn, Akshay Kumar should make the commercial and hire Kamal or Vinay to sweep the lawn. As long as Akshay Kumar pays more than Rs. 80 and less than Rs.50,000, both of them are better off. Countries can benefit from specialization and trade with one another in the same way individuals can. The gains from trade do not disappear at national borders.