What Drives International Trade?
• The fundamental force that generates trade between nations is comparative advantage . • The basis for comparative trade is divergent opportunity costs between countries. • National comparative advantage as the ability of a nation to perform an activity or produce a good or service at a lower opportunity cost than any other nation . How Global Markets Work • • The opportunity cost of producing a T-shirt is lower in China than in the United States, so China has a comparative advantage in producing T-shirts. • The opportunity cost of producing an airplane is lower in the United States than in China, so the United States has a comparative advantage in producing airplanes. • Both countries can reap gains from trade by specializing in the production of the good at which they have a comparative advantage and then trading. • Both countries are better off. How Global Markets Work • How Global Markets Work • Figure 7.1(a) shows U.S. demand and U.S. supply with no international trade. • The pri
