Global trade refers to international trade in goods and services. Countries benefit from trade due to comparative advantage, the idea that every country should specialize in producing the good it is least bad at producing.
Example of Comparative Advantage.
The usual example of comparative advantage compares two countries (say A and B) producing two goods, say fish and wheat. Given that each country uses all of its resources, the following table shows how much of each good each country can produce:
| Country | Fish | Wheat |
|---|---|---|
| A | 100 | 200 |
| B | 50 | 75 |
For example, if Country A uses all of its resources (land, labor and capital) to produce fish, it produces 100 fish. If it, instead, uses all of its resources to produce wheat, it produces 200 units of wheat. For country A, the cost of producing one fish is 2.0 wheat. For country B, the cost of one fish is 1.5 wheat.
Let's suppose country B would like to consume 25 fish. On its own, it can then also produce 37.5 wheat since it will devote half of its resources to fish and half to wheat.
Suppose, instead, that Country B can trade with Country A. Country B produces 50 fish and trades half to Country A. What is Country A willing to pay? On its own, country A can get 2 wheat for every fish, so Country A will trade no more than 2 wheat for every fish. Let's suppose Country A is willing to trade one fish for 2 wheat. Then Country B gets 50 wheat for the 25 fish. In the end, Country B then has 25 fish (that it produced) and 50 wheat (for which it traded). Of course, Country B is better off since it still has 25 fish, but has more wheat.
Notice that Country B is better off with trade despite the fact that Country B is worse at producing both goods.
Of course, wheat workers in Country B may not be happy because the resources being devoted to wheat production have to shift to fish production.