What are Gains From Trade?

Gains from trade is the net gain achieved by countries, organizations or individuals from trade. Trade works because it allows countries and organizations to focus on their comparative advantage.

Example

You can produce bushels of apples for $10 and bushels of wheat for $50. A foreign country can produce bushels of apples for $50 and bushels of wheat for $10. If you produce apples and trade for wheat and the foreign country does the opposite, both nations will have more food for equal spend.

Let's say you have $100 that you want to spend equally on apples and wheat. If you produce domestically you will get:

5 bushels of apples

1 bushels of wheat

If you buy domestic apples and foreign wheat you will get:

5 bushels of apples

5 bushels of wheat

The other benefit is that since you produce apples for $10 and the foreign country can only produce them for $50 you can surely sell apples into that market at some markup such as 50% and still capture the market as you outcompete in apples. If the foreign country also puts a 50% markup the following are the prices for apples in the foreign country:

Your apples: $15 / bushel

Their apples: $75 / bushel

As such, you would likely achieve 100% market share.

Overview: Gains From Trade
Area	Economics
Definition	The net gain from trade that results from focusing on comparative advantages rather than producing all goods domestically.
Related Concepts	Competitive Advantage