Specialization and Trade

Engaging in trade produces significant economic benefits. In fact, the main reason for the existence of trade is its mutually enriching effect. According to Ahearn (2011), trade increases an entity’s economic efficiency, which leads to greater output from scarce resources. To maximize the gains reaped from trade, economists advocate for specialization, the rationale being that “by allowing each participant to specialize in producing what it is relatively more efficient at…, trade can increase economic well-being above what would be possible without trade” (Ahearn, 2011 p.1). This assertion is supported by two key concepts: absolute advantage and comparative advantage. The concept of absolute advantage postulates that countries should only import goods that they cannot produce efficiently; they should export those goods whose production at home is more efficient (Shenkar, Luo & Chi, 2014). On the other hand, comparative advantage theory posits that countries should consider the quantity of output of a given commodity that has to be forgone in order to produce an extra unit of another commodity. If it is established that a country’s opportunity costs in the production of two given commodities are different within different markets, the country is said to have comparative advantage (Ahearn, 2011).

Drawing upon the theories of absolute advantage and comparative advantage, a country like the United States can reap identifiable benefits from trade and specialization. For example, since the US is highly efficient in wheat production, specializing in this and exporting wheat to non-wheat producing countries would generate significant returns. Precisely, the US should sell its wheat to a country such as Colombia, whose absolute advantage lies in coffee production (Shenkar et al., 2014). By specializing in the production of goods in which they are most efficient, both countries would reap substantial benefits.

Specialization and trade are indicative of the aspect of free trade, which is argued to be beneficial to the countries that engage in it. In the article “How UK-EU trade deal will change relations between Britain and Brussels”, Fleming and Brunsden (2020) outline several benefits associated with free trade agreements. Outlining these benefits indicates that the article supports free trade agreements

References

Ahearn, R. J. (2011). Trade Primer: Qs and As on Trade Concepts, Performance, and Policy. Congressional Research Service.

Fleming, S. & Brunsden, J. (Dec 4 2020). How UK-EU trade deal will change relations between Britain and Brussels. Financial Times. www.ft.com/content/8e6db389-9e09-4c00-9b49-687a2dafd2ca

Shenkar, O., Luo, Y. & Chi, T. (2014). International business. Routledge.