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    Why do nations trade? Analyze American imports and exports.

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    Countries trade due to the principles of comparative advantage which tell us that if one country is more efficient at producing one good than another it will benefit from trading with another country that also has different efficiencies. This holds true even in the event of absolute advantage, where one country has an advantage in efficiencies for every single product a different country can produce. Since both countries will have different relative efficiencies within their own countries, they can always produce their most efficient good and then trade that for a mix of other goods and end up with a better mix of goods than they could have produced domestically.

    For example, suppose America produces 3 million apples an hour and 4 million oranges an hour. Suppose Mexico produces 2 million apples an hour and 3 million oranges an hour. America has an absolute advantage over Mexico. It can have either 4 million apples or 3 million oranges for 1 hour's work. Suppose it wants to maximize 2 hours of work. It can produce 8 million apples and trade 4 million of them with Mexico, which would trade them for 5 million oranges (since it can produce 4 million apples in 2 hours and 6 million oranges in 2 hours). Both countries now have more apples and oranges than they would have had if they just produced an hour of each. Thus, when both countries produce to their strengths, they can trade and both countries are better off than they would be without trade.

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