Analysis of Trading Based on Comparative Advantage Principle

This essay discusses how trading is structured on the principle of comparative advantage, highlighting its influence on international trade. It explains that comparative advantage allows countries to specialize in producing goods at a lower opportunity cost, leading to mutual benefits and increased consumption possibilities beyond the production possibility frontier. The paper analyzes how specialization based on comparative advantage results in higher total output and consumption levels, enabling countries to benefit from each other's low opportunity costs. It also addresses the scenario where large countries with absolute advantages can still gain from specializing in their comparative advantages. The essay concludes that comparative advantage plays a critical role in defining what a country should produce, allowing states to leverage their favorable conditions.

Running head: HOW TRADING IS BASED ON A COMPARATIVE ADVANTAGE 1
How Trading Is Based On a Comparative Advantage
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How Trading Is Based On a Comparative Advantage
In essence, the new outlook on the aspect of trade has hugely influenced how countries
engage in trading activities for the last couple of decades now. One of the recent developments in
this particular field is the concept of ‘comparative advantage.’ In this light, comparative
advantage refers to the overall ability of a particular country to be in a position of producing one
good at a lower opportunity cost compared to the others. According to the principle of
comparative advantage, all countries including those that inefficient of the production of all
goods stand a chance of benefiting from a particular trade as opposed to the Absolute Advantage.
This paper proposes to discuss how trading is structured on the principle of comparative
advantage. Additionally, the paper will tend to analyze how a large country might not have a
comparative advantage.
The influence of comparative advantage on trade is no doubt enormous. In this light,
comparative advantage is responsible for describing a situation in which a particular individual,
country, or even business can be in a position of producing goods or instead services at a lower
opportunity cost compared to another producer. For instance, because maple trees have been in
abundance in Canada, it can be able to produce maple syrup at a very low opportunity cost
compared to avocados (Andrieu & Groh, 2018). This is because the climatic condition of Canada
is less suited for the production of avocados. On the other hand, Mexico has ample sunshine as
well as a warm climatic condition which favors avocados thus it can be produced at a much
lower opportunity cost compared to maple syrup.
Primarily, the specialization in production in regards to comparative advantage is likely
to result to exchange in various opportunities that in most cases lead to the consumption of
opportunities that is often beyond the production possibility frontier (PPF) (Duan, Hotchkiss, &

HOW TRADING IS BASED ON A COMPARATIVE ADVANTAGE 3
Jiao, 2018). In this light, trade between two particular countries or rather agents make it possible
for the states to enjoy a somewhat higher total output as well as a level of consumption compared
to what would have been produced domestically (Wang, Xue, & Xing, 2018). Notably, makes
countries to experience more of what they provide than they could have enjoyed in case there
would not be traded. In this light, a comparative advantage, as well as opportunity cost, has been
tipped to determine the overall terms surrounding trade for exchange where beneficial mutual
trade can take place. It is; therefore, apparent that comparative advantage gives countries room to
produce what they are best at on a lower opportunity cost and trade with the other one which
specializes with other goods and services.
Furthermore, in case of countries increase the production in the areas of their
comparative advantage and trade with one another, each state stands a chance of benefiting in
this light, the production possibilities frontier remains an essential tool in visualizing such
benefit. Trade gives each country a chance of taking the maximum advantage of the low
opportunity costs in other countries (Yeh & Hsu, 2018). Another example is when the United
States takes advantage of the small opportunity costs of manufacturing refrigerators while
Mexico concentrates on shoe production due to the low opportunity costs in Mexico (Chen,
2018). In this light, trade allows America to take full advantage of the lower opportunity costs of
the creation of shoes in Mexico. This shoes that comparative advantage plays a significant role in
defining the commodities that are available in trading activities. The theory of comparative
advantage, therefore, explains why people are engaged in trading activities in the society.
While comparative advantage is considered an essential tool in trade, there are big
countries which have higher possibilities of having an absolute advantage. In essence, this is a
typical scenario particularly for high-income nations which mostly have a well-educated

HOW TRADING IS BASED ON A COMPARATIVE ADVANTAGE 4
employee, highly technologically advanced tools, and current production processes. In this light,
such big countries can be I a position of producing all the necessary products with somewhat
fewer resources compared to another low-income country (Ezeani, 2018). Even though a large
country can provide virtually all products manufactured by others, they can still gain from trade
especially from the aspect of specialization in one’s comparative advantage. In this case,
productivity in a large country is always based on the productivity of workers. It is, therefore,
possible for a country with a large population not to enjoy the benefits of comparative advantage.
However, such countries benefit from the level of productivity given the high level of products.
In conclusion, it is clear that comparative advantage plays a critical role in defining what
a particular country should produce. Notably, this is because a state is allowed to create what is
favorable in that country.

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