Showing with an example that trade can leave both sides better off

The idea. Trade is not a game in which what one side wins the other must lose; when people or countries exchange, each can come out ahead, and buyers also get a wider range of goods at lower prices. The source of the gain is comparative advantage. A party has a comparative advantage in a good when it produces that good at a lower opportunity cost, that is, by giving up less of the other good. A party that is better at producing everything (an absolute advantage in both goods) can still gain from trading with a less productive one.

Example (our own): Gurpreet and Lakshmi. In one working day, Gurpreet can pack 40 boxes of tomatoes or weave 8 baskets; Lakshmi can pack 10 boxes or weave 4 baskets. Gurpreet is more productive at both tasks.

Lakshmi gives up fewer boxes for each basket (2.5 against 5), so she has the comparative advantage in baskets; Gurpreet gives up less for each box (0.2 basket against 0.4), so his comparative advantage lies in boxes.

Before and after the exchange.

• Each works alone, spending half the day on each task: Gurpreet ends with 20 boxes and 4 baskets, Lakshmi with 5 boxes and 2 baskets. Together: 25 boxes and 6 baskets.
• Each leans towards the cheaper task: Lakshmi weaves all day (4 baskets); Gurpreet packs for three-quarters of the day (30 boxes) and weaves for the rest (2 baskets). Together: 30 boxes and the same 6 baskets, so 5 boxes more than before.
• They exchange at 4 boxes for 1 basket: Lakshmi hands over 2 baskets and receives 8 boxes.
• Result: Gurpreet has 22 boxes and 4 baskets (2 boxes more than alone); Lakshmi has 8 boxes and 2 baskets (3 boxes more than alone).

Why each side gains. Each ends with as many baskets as before and more boxes, so each is better off; the 5 extra boxes made possible by specialising are shared between them. The exchange rate of 4 boxes a basket lies between their two opportunity costs (2.5 and 5 boxes), so Lakshmi sells baskets for more than they cost her and Gurpreet buys them for less than it would cost him to weave them. This works because their opportunity costs differ: each should specialise where its opportunity cost is lower.

Conclusion. Specialising by comparative advantage and then exchanging at a rate between the two opportunity costs raises total output and leaves both parties better off, even when one of them is more productive at everything. The same reasoning explains why countries gain from trading with each other.