Principles for Preferable Exchange and Reciprocal Exchange

Abstract

Absolute and comparative advantage is examined by creating a guiding principle for assessing to what extent trade is preferable and to what extent an economy has absolute or comparative advantages. The principle builds on the relative use of factors of production domestically, or the internal rate of exchange, in comparison to the external rate of exchange in the specialized product between trading partners. The principle simplifies the use of absolute and comparative advantage by using relative prices. The principle states that trade is preferable from a country point of view, as long as the external rate of exchange in the specialized product is greater than the pre-trade internal rate of exchange. Moreover, the principle enables us to establish a guiding principle for the reciprocity of trade.

Keywords: Comparative Advantage, Absolute Advantage, Relative Prices, Reciprocity of Trade

JEL Classification: F1, F11