Question

What exactly allows individuals to consume more if they specialize and trade than if they don't?

Short answer

Individuals can consume more if they specialize and trade because specialization leads to increased efficiency and production. Trade then allows these specialized goods to be exchanged, effectively increasing the overall level of goods available for consumption by every party involved. Each party can thus consume more than they could if they relied on their own production alone.

Step-by-step solution

Understanding the Concept of Specialization

Specialization is a method of production where an entity focuses on the production of a limited scope of goods to gain a greater efficiency. This can be at an individual, firm, or country level. By devoting all resources to a particular area of expertise, the individual, firm, or nation may be able to produce more output or higher quality output than if it attempted to produce multiple items at once.

Understanding the Concept of Trade

Trade involves the exchange of goods or services for others or for money. In economic theory, international trade is the exchange of goods and services between countries. Trade allows regions to benefit from specialization by not only producing what they are most efficient at, but also by consuming a diverse range of goods and services produced by others.

Connecting Specialization and Trade with Increased Consumption

When individuals, firms, or countries specialize in producing something they can produce efficiently, they can produce more of it. When these entities then trade their specialized goods or services, it creates an overall increase in efficiency and production. This increased production means more can be consumed. Each trading entity can benefit by obtaining what they need or want at a lower opportunity cost than self-producing.