Question

How does comparative advantage lead to gains from trade?

Short answer

Focusing efforts on products they specialize in they can produce more output and sell additional outputs to others

Step-by-step solution

Step 1. Introduction

Comparative advantage refers to the ability of a person, firm, or region to produce a product at a relatively lower opportunity cost.

Step 2. Explanation

Persons, firms, or regions that enjoy comparative advantage can focus on producing goods they specialize in. They would be able to produce more output. The additional output can be sold to people who do not specialize in producing the good and thus have a higher opportunity cost.

The income earned from selling the output can be used to purchase goods they do not specialize in.