Question

How does comparative advantage lead to gains from trade?

Short answer

Due to exchange opportunities and higher total output and level of consumption, comparative advantage lead to gain from trade.

Step-by-step solution

Step 1. Meaning of comparative advantage.

It is an economy's ability to produce a particular good or services at a lower opportunity cost than its trading partners. Basically, comparative advantage refers to the products that a country can produce more cheaply or easily than other countries.

Step 2. Following are the ways by which comparative advantage lead to gains from trade, these are:-

a) Due to this comparative advantage, this lead to results in exchange opportunities that lead to consumption opportunities beyond the PPC.

b) Due to the trade between two countries or agents, it allows the countries to enjoy a higher total output and level of consumption than what would have been possible domestically.