ExampleYou 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 apples1 bushels of wheatIf you buy domestic apples and foreign wheat you will get:5 bushels of apples5 bushels of wheatThe 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 / bushelTheir apples: $75 / bushelAs such, you would likely achieve 100% market share.
|Overview: Gains From Trade|
The net gain from trade that results from focusing on comparative advantages rather than producing all goods domestically.