gains from trade

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The improvement in welfare possible as the result of countries being able to trade with one another, as compared with a position of autarchy. Gains from trade arise from two principal sources. One is differences in factor endowments: countries have different natural resources, and different proportions between labour of various types and stocks of capital. Countries can thus gain from inter-industry trade, exporting goods which their resources are relatively well adapted to produce, and importing goods where they have no or poor production possibilities. The other source of gains from trade is economies of scale: intra-industry trade in differentiated products allows countries to produce on a substantial scale while their consumers enjoy the benefit of having a wide variety of product types available. While the gains from inter-industry trade accrue mainly to a country's plentiful factors of production, and its scarce factors may lose through trade, the gains from intra-industry trade are available to all. Thus where both forms of trade are substantial, it is likely that all factors in an economy gain from trade.

Subjects: Economics.

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