Opportunity Costs and International Trade
How does Opportunity Costs relate to International Trade?
Written by Jason Gordon
Updated at March 21st, 2023
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How does Opportunity Costs relate to International Trade?
Both parties can benefit from specializing in their comparative advantages and trading. By using the opportunity costs it is possible to identify the range of possible trades that would benefit each country.
Trade allows each country to take advantage of lower opportunity costs in the other country. If one country wants to produce more of both products without trade, it must face its domestic opportunity costs and reduce production of another product.
The theory of comparative advantage explains why countries trade: they have different comparative advantages. It shows that the gains from international trade result from pursuing comparative advantage and producing at a lower opportunity cost.