Why Country should trade

trade would promote one’s welfare..don’t believe so?

allow me to use a simple story to explain this.

Let’s assume one day Mr.A and Mr.B were travelling.

Mr.A and Mr.B were on the same plane but the engine went wrong so the plane crushed on an unknown island.

The island only has the resources of fishes and coconuts.

A is good at climbing trees so he is more efficient at collecting coconuts

B is a swimmer so he catches more fish than A.

 Person / Goods Coconuts Fishs
A 24 (productivity in a day) 12 (productivity in a day)
B 12 (productivity in a day) 24 (productivity in a day)

Suppose A and B doesn’t talk and interact with each other (autarky no trade)

and A and B both need to consume 8 coconuts (water) and 8 fishes (meat) to survive

so A would need to use 2/3 of his time on fishing to catch 8 fishes , and obtain 8 coconuts by using the remaining time

for B, he uses 2/3 of its time on coconuts, he will also get 8 coconuts and 8 fishes.

they both have (8,8) on fishes and coconuts

as we can derive from this, the oppotunity cost of coconuts and fishes for both Mr.A and Mr.B is 1, which means it is equivelent to the price of 1. (1 coconut for 1 fish)

in this light, the total GDP of the island is (16,16): A (8,8): A has 8 fishes and 8 coconuts B(8,8): B has 8 fishes and 8 coconuts.

Now let assume A does talk with B, and they trade with each other.

From the information, A now knows B is better at catching fishes, and B knows A is better at getting the coconuts. (so called the comparative advantage)

In this light, they made a deal with each other: from now on, A and B is only going to produce what they are good at.

A then devote all his time in a day at collecting coconuts and at the end of the day he got 24.

B devote his time on catching fishes, and he got 24 too.

Now they trade with each other. Because the oppo. cost is the same, so 1 fish is in exchange with 1 coconut.

so A traded 12 coconuts for 12 fishes from B.

now A has total 12 coconuts ans 12 fishes (12,12)

and B has the total of 12 coconuts and 12 fishes (12,12)

the total island GDP is (24, 24).

after trade, the island total GDP rises from (16,16) to (24,24)

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