ABSTRACT
Nations (more accurately, individuals and firms in different nations) trade with each other because they benefit from it. Other motives may be involved, of course, but the basic motivation for international trade is the gain to the participants. In this chapter, we examine the fundamental insights of classical economists who wrote in the late eighteenth and early nineteenth centuries. They noted that gains from international trade arise because specialization enables resources to be allocated to their most productive uses in each trading nation. Everyone recognizes that it would be foolish for a town or a province to try to be self-sufficient, but we often fail to recognize that the benefits of specialization and the division of labor also exist in international trade. The political boundaries that divide geographic areas into nations do not change the fundamental nature of trade, nor do they remove the benefits it confers on the trading partners. Our goal in this chapter is to establish and illustrate this basic truth.
