sep 212021

In reality, there are, of course, reasons other than trade barriers why factors of production such as capital or labour should not move across borders, even if there are no barriers and higher returns could be obtained in other markets. Workers, for example, are reluctant to leave their homes, family and friends, and investors are reluctant to invest in other markets where they are less familiar. As a result, even the removal of all state-imposed barriers to trade for capital and labor would not result in full compensation for costs between counties. Here`s the reason: If you change paint and carpentry during a six-day work week, you`ll produce three paintings and three cabinets worth $2,250. If your neighbor has the same worktop, he would make a painting and two cabinets worth $1100. In total, four paintings and five cabinets would be produced: nine production units in total. However, if you focused on painting, the area where you have the greatest comparative advantage and gain, and carpentry to your neighbor, something magical would happen. You would make six paintings worth $2,400 a week, while your neighbor would produce four cabinets worth $1,400, bringing the total to 10 production units. In reality, you and your neighbor would be richer for specialization – and the local economy is a unit of production that is better for that.

Comparative advantage is an economic law of the early 1800s that shows how useless protectionism (or mercantilism, as it was then called) is in free trade. David Ricardo`s popular comparative advantage asserts that free trade works even if a partner has absolute advantages in an agreement in all areas of production – that is, a partner makes products cheaper, better and faster than its trading partner. We all have a good intuitive understanding of the power of trade. On the simplest level, if you have something I want, and if I have something you want, and we exchange with each other, we are better together. Even where the country produces the product, the intensification of competition resulting from trade liberalization is likely to lead to lower prices for domestic firms. In this case, part of the consumer`s savings is then spent on consuming other products. The amount spent on the consumption of other products will have positive production effects that will somewhat mitigate the loss of production of the company competing with imports. Comparative advantage pushes nations to participate in true free trade and specialize in areas where they have the greatest expertise and success – instead of trying to strengthen weak industries by instituting protective tariffs that otherwise stifle production that generates general prosperity gains. The advantages of comparative advantage are reduced when domestic industries are subsidized or when foreign industries are subject to import duties. In analyzing the effects of a surplus or deficit, economists often consider the notion of ”trade” to be very broad.

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