Trade can make everyone better off

The principle. Trade can make everyone better off is one of the principles of economics. Trade is not a contest in which one side's gain is the other's loss: when people or countries trade, each can specialise in what it does best and both end up with more goods, and consumers get a wider choice at lower prices.

Why both sides gain: comparative advantage. A producer has a comparative advantage in a good if it can produce it at a lower opportunity cost, that is, by giving up less of the other good. Even a producer who is better at making everything (an absolute advantage in both goods) has a comparative advantage in only one of them, and gains by specialising in it and trading for the other. Total output rises when each specialises according to comparative advantage, so the gains can be shared.

Example (our own). Meera and Kabir run two small farms near Nashik. In a day Meera can pick 60 kg of grapes or 30 kg of onions; Kabir can pick 20 kg of grapes or 20 kg of onions. Meera is better at both (an absolute advantage in both).

• Opportunity costs. One kg of onions costs Meera 2 kg of grapes but costs Kabir only 1 kg, so Kabir has the comparative advantage in onions. One kg of grapes costs Meera 0.5 kg of onions and Kabir 1 kg, so Meera has the comparative advantage in grapes.
• Without trade, Meera spends two-thirds of each day on grapes and one-third on onions (40 kg grapes, 10 kg onions); Kabir spends half on each (10 kg grapes, 10 kg onions). Together: 50 kg grapes, 20 kg onions.
• With specialisation, Kabir grows only onions (20 kg) and Meera spends nine-tenths of the day on grapes (54 kg) and one-tenth on onions (3 kg). Together: 54 kg grapes and 23 kg onions, more of both.
• The trade. Meera gives Kabir 12 kg of grapes for 8 kg of onions, a price of 1.5 kg of grapes per kg of onions, between their opportunity costs (1 for Kabir, 2 for Meera). Meera ends with 42 kg grapes and 11 kg onions (against 40 and 10); Kabir ends with 12 kg grapes and 12 kg onions (against 10 and 10). Both have more of both goods.

Conclusion. Because opportunity costs differ, specialisation and trade raise total output, and a price between the two opportunity costs lets every trading party gain. That is the sense in which trade can make everyone better off.