Explain the concept of comparative advantage and the principle theories of why trade occurs.

             First it is crucial to understand the concept of comparative advantage which is "The person or country that produces a good with a smaller quantity of inputs, or that produces more output per unit of input, is said to have an absolute advantage in producing that good ". To illustrate the concept of comparative advantage requires at least two goods and at least two places where each good could be produced with scarce resources in each place. .

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             The example drawn here is from Ehrenberg and Smith (1997), page 136. Suppose the two goods are food and clothing, and that "the price of food within the United States is 0.50 units of clothing and the price of clothing is 2 units of food. [Suppose also that] the price of food in China is 1.67 units of clothing and the price of clothing is 0.60 units of food." Then we can say that "the United States has a comparative advantage in producing food and China has a comparative advantage in producing clothing. Countries usually trade to buy goods that are produced at a lower cost elsewhere. Countries and people have different costs of production or (to put it differently) different abilities in producing goods. They can take advantage of their differences in order to make themselves better off. When they do this, they experience gains from trade. (Moffat, 2011).

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             Analyze and discuss the sources of comparative advantage in national economies.

             First, endowments of key inputs may vary from nation to nation, just as endowments of talents, .

             skills and physical characteristics vary across individuals. Oranges are grown at lower cost in Florida than in Iowa, for example, while Iowa excels in producing corn. Floridians and Iowans share gains from exchange according to comparative advantage by trading Florida oranges for Iowa corn. Similar gains are realized when Americans trade with foreigners "efficiency requires using all the world's resources in the relatively most productive ways.