The Advantage of Trade

All of us purchase products that are made by different people in companies not only in the U.S., but in different countries as well. By trading with each other, it allows individuals to specialize in areas of expertise and allows everyone to have the benefit of using or consuming numerous different products. This not only gives us variety, but positively impacts all parties involved.

Specialization and Advantages

Specialization in an industry can be seen in many ways. For example, let's look at fully self sufficient phone company in a small town. This company provides all the telephone usage in the town and does this very efficiently. Also this company has been able to provide its own infrastructure maintenance and rebuild. However, this infrastructure only serves as an access to the service that the phone company provides. Now, a telecommunications maintenance company offers to provide maintenance to the phone company's infrastructure, as needed, for a price. Although the phone company can provide both services, providing daily maintenance to the infrastructure limits the amount of home installations that can be scheduled per day.

The maintenance company could provide their specialized service to the phone company, at their benefit, because of comparative and absolute advantage. Mankiw (2004), tell us that when a person can produce a good with smaller number of inputs holds an absolute advantage and a person who has smaller opportunity cost of producing goods hold a comparative advantage. Because the phone company limits installations per day because of maintenance schedules, daily revenues increased installations could bring are restricted. Because the maintenance company specializes in this process by training, equipment, etc..., they can provide this service at a lower cost than the phone company can, giving them and absolute advantage. In addition, the smaller opportunity cost of providing this cost gives the maintenance company a comparative advantage. By trading this service with the maintenance company, the phone company can increase its revenues by performing more home installations and saves money by contracting out services. This also allows the company to provide low cost products to customers and remain competitive with rival phone providers. Finally, this process also allows each respective company to specialize in the areas that they best perform at.

This example shows the advantages of trade. Although the trade is service for money and not a product for a product, the trade advantage is clearly seen. This example shows how trade has advantages in a local community, but advantages apply internationally as well when other countries hold absolute and comparative advantages.

References:
Mankiw, N. G. (2004). Interdependence and the Gains from Trade. In Principles of economics (3rd ed., pp. 45-57). Chicago: Thomson South-Western.