Question

Which option best explains why countries trade with each other?

Answer 1

Because of comparative advantage — countries specialize in producing goods and services they can make at lower opportunity cost than others, then trade to obtain the rest. Specialization raises total output and lets every country consume more than it could alone.

Brief example: if Country A can produce either 10 cloth or 5 wine a day (opportunity cost of 1 cloth = 0.5 wine) and Country B can produce either 6 cloth or 6 wine a day (opportunity cost of 1 cloth = 1 wine), A has a comparative advantage in cloth and B in wine. If A specializes in cloth and B in wine and they trade, both can end up with more cloth and wine than without trade.

(Other contributing reasons: differences in resources and technology, consumer tastes, economies of scale, and risk diversification — but comparative advantage is the fundamental explanation.)