ABSTRACT
This chapter provides an introduction to why and how people trade with each other. It focuses on what determines patterns of trade and the underlying sources of the gains from trade. A basic proposition of economics is that trade makes people better off. One of the reasons that trade makes people better off is because it helps allocate goods and services to those who value them the most. Trade also allows people to take advantage of gains from specialization. In order to appreciate why this is so, it is first necessary to consider the constraints that individuals face in production. It will then become clear that parties can be made better off by specializing in the production of one good and then trading that good in exchange for other products or services. The production possibility frontier traces out combinations of the quantity of two goods that an individual or a country can produce if it uses all of its resources.
