Answer to Question #284032 in Economics for Hafsa

Question

Why does specialization in production with trade proceed only up to the point where relative commodity prices in the two nations are equalized? How is the equilibrium-relative commodity price with trade determined?

Answer 1

A country can make and sell goods affordably and buy goods that it is inefficient at making.

Countries become better at making the product they specialize in. Consumer benefits: Specialization means that the opportunity cost of production is lower, which means that globally more goods are produced and prices are lower. Consumers benefit from these lower prices and greater quantity of goods.

The concept of absolute advantage was developed by Adam Smith in The Wealth of Nations to show how countries can gain by specializing in producing and exporting the goods that they produce more efficiently than other countries, and importing goods other countries produce more efficiently.