The principle of free trade is based on the law of comparative advantage. The law of comparative advantage states that if countries specialise in producing what they have a relative advantage (lower opportunity cost) then there will be a net gain to society. This essay is an explanation of the difference between absolute and comparative advantage.
This occurs when one country can produce a good with fewer resources than another. For example if France can produce wine with less resources than the UK, then France should specialise in the production of wine.
A country has a comparative advantage over another in the production of a good if it can produce it at a lower opportunity cost. I. e. if it has to forego less of other goods in order to produce it.
Benefits of Trade
1. The law of comparative advantage states that trade can benefit all countries if they specialise in the goods in which they have a comparative advantage. As a result consumption increases because of specialisation.
2. Specialisation will result in economies of scale . Economies of scale occur when increased output leads to lower average costs of production. This is a major feature of globalisation and the specialisation it enables.
More: Macro Economics Essays
Richard Pettinger studied Politics and Economics at Lady Margaret Hall, Oxford University. He now works as an economics teacher in Oxford. He enjoys writing essays on Economic and he edits a site - Economic Help. http://www.economicshelp.org/