Question

One of the principles of economics is that trade can make everyone better off. Explain why this might be so, grounding your discussion in the economic principles. Conversely, do you think trade necessarily has to make everyone better off? Why or why not?

Answer 1

Yes, this is true that trade can make everyone better off because those two parties trading get the chance of trade that product in which they have the advantage of producing it, in which they are good in producing, in which they get the resources at cheaper rates, in which they have lower opportunity cost. Assume a case Japan is good in producing cars, no other country can produce cars at cheaper rates than Japan while US is good in producing Computers, no other country can produce computers at cheaper rates than US. This is the case of trade where both countries can make themselves better off by trading and it will make prices of cars cheaper in US and prices of computers cheaper in Japan and make consumers also better off. If US focus on producing Cars so that they do not have to import from Japan, they will end up using less resources for Computers in which they have advantage and they will produce cars at dearer rates which makes consumers worse off. With trade US / Japan producers are better off as they are extracting the benefits from producing goods in which they are good. Consumers are better off as they are getting less prices. Government is better off as they are getting enough revenue from import duty.

I do not think trade has to make everyone better off. Assume a case when Pakistan is full of debt and only left with resources which can produce limited goods. Producing those goods are costly for them. Assume Pakistan can produce crop at $2 per Kg and the cost of producing crop in Pakistan is $1.98. India is willing to pay maximum $2.1 per Kg for that crop and the cost of producing that crop in India is $3. Here as Pakistan is full of debt, they do not money to survive even for 2 days, they will end for exporting crop to India. Here Pakistan is not better off while India is better off. Thus, this cannot be said that trade necessarily will make everyone better off.