Gains From Trade and the Benefit of Specialization

An error occurred trying to load this video.

Try refreshing the page, or contact customer support.

Coming up next: Absolute Advantage in Trade: Definition and Examples

You're on a roll. Keep up the good work!

Take Quiz Watch Next Lesson
Your next lesson will play in 10 seconds
  • 0:10 Why Nations Trade
  • 1:30 Benefits of Specialization
  • 4:19 Summary
Save Save Save

Want to watch this again later?

Log in or sign up to add this lesson to a Custom Course.

Log in or Sign up

Speed Speed Audio mode

Recommended Lessons and Courses for You

Lesson Transcript
Instructor: Jon Nash

Jon has taught Economics and Finance and has an MBA in Finance

Explore one of the most widely accepted ideas in economics - the idea that nations benefit from specialization and exchange, reaping gains from trade.

Why Nations Trade

Why do nations trade goods with each other? Nations exchange goods with each other when they expect to gain from the exchange. We call that gains from trade. Adam Smith, a famous economist from the 18th century, talked about this in his book, Wealth of Nations, and so did economist David Ricardo.

The theory of comparative advantage teaches us that nations should specialize in the production of the goods in which they have the lowest opportunity cost, and trade with other nations.

The reason this works is because nations tend to have different resources, and they're not equally efficient when they are producing goods, which means they have different opportunity costs. When they have different opportunity costs of producing goods, it is possible to gain from trading. When both nations trade, they both will experience an increase in output, because they don't have to switch between one task and another. They also increase their skill level because they're doing the same task over and over again. This makes them more productive, and empowers them to produce at a level that goes beyond their production possibilities curve.

The Benefit of Specialization

For example, let's say that the United States can produce more strawberries with the same amount of resources than Canada can. This means the U.S. has an absolute advantage in the production of strawberries. Now, my first thought about that would be, the U.S. should definitely specialize in strawberries because in this example, they are the best at it. But my perspective is nearsighted, because I'm not accounting for the concept of opportunity cost, which shows me what the U.S. would have to give up in order to specialize.

Having an absolute advantage in the production of a good doesn't always mean you have a comparative advantage.

The graph shows Canada has the lowest opportunity cost for strawberries
Fruit Opportunity Cost Graph

So let's take this idea further and see where it leads:

The U.S. can produce 20 strawberries or 80 apples while Canada can produce 15 strawberries or 5 apples. That means that the opportunity cost to the United States of producing 1 strawberry is 80/20, or 4 apples. It also means that if the U.S. specialized in strawberries, they'd have to give up 4 times as many apples to do so.

Canada's opportunity cost of producing 1 strawberry is 5/15, or 1/3 of an apple. If they decide to specialize in strawberries, they'd only have to give up only 1/3 of the amount of apples to do so.

To unlock this lesson you must be a Member.
Create your account

Register to view this lesson

Are you a student or a teacher?

Unlock Your Education

See for yourself why 30 million people use

Become a member and start learning now.
Become a Member  Back
What teachers are saying about
Try it risk-free for 30 days

Earning College Credit

Did you know… We have over 200 college courses that prepare you to earn credit by exam that is accepted by over 1,500 colleges and universities. You can test out of the first two years of college and save thousands off your degree. Anyone can earn credit-by-exam regardless of age or education level.

To learn more, visit our Earning Credit Page

Transferring credit to the school of your choice

Not sure what college you want to attend yet? has thousands of articles about every imaginable degree, area of study and career path that can help you find the school that's right for you.

Create an account to start this course today
Try it risk-free for 30 days!
Create an account