By: Staff Writer Richard Wheeler
The benefits of international trade are well documented, but why exactly is international trade beneficial? Every country has a production possibility frontier, which illustrates the possible points at which a country is most efficiently allocating its resources for production. In order for a country to reach a level that is outside of its domestic production possibility frontier, it must engage in trade with another country. Specialization involves producing a good in which you have a comparative advantage. A comparative advantage occurs when one country has a lower opportunity cost than another in producing a given good. Opportunity cost is defined as the cost of the next best alternative. If the United States can produce computers at a cost of 7 shirts per computer, and China can produce computers at a cost of 20 shirts per computer, the United States has a comparative advantage in producing computers because it has to forgo less shirts than China per computer.
By engaging in international trade, both countries would benefit, as they would be receiving the goods they desire for a cheaper price than they could without international trade. A computer exported to China can be traded for 20 shirts, while a computer sold in the domestic market can only be sold for 7 shirts. Therefore, the United States would manufacture computers and China would manufacture shirts. By engaging in trade, both countries can operate at levels are outside of their production possibility frontier. In reality, trade can be much more complicated, but this is a simple explanation of why international trade is beneficial to both parties.