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Why Countries Trade with Each Other

Why would a country such as the United States, which can presumably produce everything it needs itself, choose to trade with other nations?

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In general, countries trade with each other because of an economic concept known as comparative advantage. According to the law of comparative advantage, a country should focus on (specialize) in producing and exporting resources which it can produce at the least opportunity cost and import the resources for which it is a high cost-producer.

To further understand this concept, let me explain what opportunity cost means. Opportunity cost can be remembered as what you give up/ what you gain. It is simply the cost of something forgone ...

Solution Summary

Gains in trade through comparative advantage. Why nations trade with each other.