In this video we consider potential gains from trade and look at the export patterns of a cluster of countries.

First constructed by David Ricardo in the 19th century, the theory of comparative advantage, specialisation and trade is a powerful one.

• Nations identify areas of comparative advantage
• They might specialise scarce resources in these industries
• This potentially creates a surplus of output
• This surplus can then be exported
• Revenues from exports can then help finance essential imports
• Trade creates potential gains in consumer welfare
• Trade is also a stimulus to economic growth and jobs
• Which can lead to positive multiplier effects
• And positive accelerator effects on capital investment

Static gains from trade

• More allocatively efficient allocation of resources
• Gains in productive efficiency from economies of scale
• Lower prices for consumers increases real incomes

Dynamic gains from trade

• Wider consumer choice
• Increased market contestability
• Transfers of ideas / knowhow
• Faster pace of innovation