James d. Gwartney

ELEMENT 1.4
Trade promotes economic progress.

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who specialize in this way will produce a larger total quantity of goods and services than
would otherwise be possible. Economists refer to this principle as the law of comparative
advantage
(?)
. This law applies to trade among individuals, businesses, regions, and nations.
The law of comparative advantage is just common sense. If someone else is willing to
provide you with a product at a lower cost than you can provide it for yourself (keep in mind
that all costs are opportunity costs), it makes sense to trade for it. You can then use your time
and resources to produce more of the things for which you are a low-cost producer. In other
words, produce what you produce best, and trade for the rest. The result is that you and your
trading partners will mutually gain from specialization
(?)
and trade, leading to greater total
production and higher incomes. In contrast, trying to produce everything yourself would mean
you are using your time and resources to produce many things for which you are a high-cost
provider. This would translate into lower production and income.
Video:
Specialization and Trade
For example, even though most doctors might be good at record keeping and arranging
appointments, it is generally in their interest to hire someone to perform these services. The
time doctors use to keep records is time they could have spent seeing patients. Because the
time spent with their patients is worth a lot, the opportunity cost of record keeping for doctors
will be high. Thus, doctors will almost always find it advantageous to hire someone else to
keep and manage their records. Moreover, when the doctor specializes in the provision of
physician services and hires someone who has a comparative advantage in record keeping,
costs will be lower and joint output
(?)
larger than would otherwise be achievable.
Third, voluntary exchange allows firms to achieve lower per-unit costs by adopting
large-scale production methods. Trade makes it possible for business firms to sell their output
over a broad market area so they can plan for large outputs and adopt production processes that
take advantage of economies of scale
(?)
, as happened after 1989 when juices from Moldova
entered the global market. Such processes often lead to substantially lower per-unit costs and

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enormous increases in output per worker. Without trade, these gains could not be achieved.
Market forces
(?)
are continuously reallocating production toward low-cost producers (and
away from high-cost ones). As a result, open markets tend to allocate products and resources in
ways that maximize the value, amount, and variety of the goods and services that are produced.
China is a perfect example of a controlled economy whose citizens, after it joined the global
trading system in 1995, were able to take advantage of the signals given by trade and
comparative advantage to lift literally billions of people (in both China and other countries in
the region) out of poverty.