Gain

See: Realized Gain, and realize what you're gaining.

Ah, the 1950s...hoops skirts, doo wop, big cars, malt shops, Elvis, and near world economic domination.

Wait, what was that last one? Yeah...during World War Two, pretty much all of the world bombed itself back into the stone age. Except for the U.S., which no one could reach with any bombers...except for Hawaii, and that was just the one time. Besides just, uh...not getting bombed, the U.S. had spent the war ramping up manufacturing production, i.e. making tanks and guns and other fun stuff.

So, after the war, the U.S. had all this capacity to make things. And in the rest of the world, they had all this need for stuff and not much production capacity. Time for some international trade. So the U.S. would make products and send them around the world. And if places couldn't afford to buy those products, the U.S. would loan them money...and then they would buy stuff with it.

A good time for U.S. business, especially manufacturing. Guys in grey flannel suits and fedoras basically ran the world. So that's an obvious example of the gains of trade. Bombed-out Europe benefited because it got much needed supplies. The U.S. benefited because people had jobs and could afford Jello with their TV dinners.

When parties are allowed to voluntarily trade with each other, things usually get better for both sides. That's gains from trade.

Say you have an island with two countries...Yolandia and Hulavania. The people of Yolandia are masters of the string arts. They can make high-quality yo-yos fast and efficiently. Meanwhile, the people of Hulavania have a knack for making circular things. They make great hula hoops.

If Yolanders have to make their own hula hoops, it takes them a long time. It also takes time away from their true love: making yo-yos. So in a typical week, the Yo-landers can make 1,000 yo-yos and 500 hula hoops, splitting their time evenly. On the other side of the island, the Hulavanians can make 300 yo-yos and 800 hula hoops, splitting their time evenly between the two. But what if they traded? What if the Yo-landers only made yo-yos and the Hulavanians only made hula hoops? Then the two countries could just trade with each other.

Well, dedicating their time completely to making yo-yos, the Yolanders can make 2,000 yo-yos. And full-time hula hoop making for the Hulavanians leads to 1,600 hula hoops. Let’s compare that dynamic to the previous output. Before the Yolanders made 1,000 yo-yos and the Hulavanians made 300 yo-yos. That’s 1,300 yo-yos total. And before the Yolanders made 500 hula hoops and the Hulavanians made 800 hula hoops. That’s 1,300 hula hoops total. But after the two started trading with each other, we got 2,000 total yo-yos and 1,600 hula hoops. Production is generally up…all thanks to the two sides getting to focus on producing their specialty.

When countries specialize, they are able to become more efficient. They end up making their product cheaper by getting better at making it than other countries could. It all depends on a country’s conditions. Like…countries by the ocean...produce seafood. Countries with good farmland...produce grains. Countries with mountains produce, uh...postcards. These conditions (specialization and natural advantage) lead to a concept called comparative advantage. Each country does what it does best. Costs for everybody go down.

Countries end up specializing in particular production….like in Yolandia and Hulavania. Rather than creating a little of everything...they specialize and make a surplus of the things they’re good at. They export these surpluses to the rest of the world. With the money they get from the exports, they can afford to import other products...the stuff they didn't produce themselves. These imports are relatively cheap because they’re being produced in countries that use their comparable advantage to produce them at a lower cost than they could generally be produced.

Everyone ends up with more of everything.

Related or Semi-related Video

Econ: What are Gains From Trade?4 Views

00:00

And finance Allah shmoop what our gains from trade Ah

00:09

the nineteen fifties hoop skirts do up big cars malt

00:13

shops Elvis in a near world economic domination by the

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U S What was that last one Yeah well during

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World War two pretty much all the world bombed itself

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back into the Stone Age Well except for the U

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S Which well nobody could reach with any bombers except

00:30

for Hawaii And well that was just that one time

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you know Well besides just not getting bombed the U

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S Had spent the war ramping up manufacturing production I

00:38

am making tanks and guns and other fun stuff So

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after the war the US had all this capacity Teo

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you know make stuff And in the rest of the

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world well they had all this need for that stuff

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and not much production capacity and well no capital and

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well pretty much no buildings Yeah well time for some

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international trade So the U S wouldn't make products and

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send them around the world And if places couldn't afford

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to buy those products well we just lend them money

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and they become bankers to the world while we're at

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it And then Well then they'd be kind of forced

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to buy stuff with us for a long long time

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till they get pay off those debts and they never

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did So they keep buying Who's good time for us

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business especially manufacturing You remember the guys the man in

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the gray flannel suit That novel Yeah they had fedoras

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and well they basically ran the world So that's an

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obvious example of the gains from trade that we made

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bombed out Europe benefited because it got much needed supplies

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And the US benefited because well people had jobs and

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could afford Jello with their TV dinners What when parties

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are allowed to voluntarily trade with each other with low

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friction while things usually get better for both sides That's

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called gains from trade in the friction yet taxes and

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transaction costs We don't want those So let's say you

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have an island with two countries Yola India and Cool

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Ooh Vania All right well the people of your land

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eah are masters of the string arts and they could

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make high quality Yo yo's fast inefficiently Meanwhile the people

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of Hu Lu Vania have a knack for making circular

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things like they make great loops Well if yo landers

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have to make their own hula hoops It takes them

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a long time Also takes the time away from their

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true love which is making yo yo's So in a

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typical week the old Landers can make a thousand yo

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goes and five hundred hoops splitting their time evenly But

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on the other side of the island the hula vain

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Ian's can make three hundred yo goes and eight hundred

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hula hoops splitting their time evenly between the two different

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numbers there Yeah but what if they traded That is

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what if the old landers on Lee made yo yo's

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and the Who Louvain Ian's only made who loops Well

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then the two countries could just trade with each other

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and optimize their production efforts Right We'll dedicating their time

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completely to making yo yo's The old landers can make

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two thousand Yo yo's in that same time period and

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full time Hula hoop making for the hula vain Ian's

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while that leads to sixteen hundred loops So let's compare

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that dynamic to the previous output Well before the old

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Landers made a thousand yo goes and the hula vain

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Ian's made three hundred yo yos and thirteen hundred yellow's

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total And before the yield Landers made five hundred Who

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loops And the Hula Vain Ian's made eight hundred Who

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loops And that's thirteen hundred hula hoops total But after

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the two gods started trading with each other well we've

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got two thousand total Yo yo's and sixteen hundred Hula

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hoops Production is generally up all things to the two

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sides getting too focused on producing their specialty and note

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There's no taxes and commissions and other stuff to cloud

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the numbers here for you like there is in real

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life Well when countries specialized they're able to become more

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efficient They end up making their product cheaper by getting

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better at making it Then other countries could write like

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Think about how awesome watches are from Switzerland They've had

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like four hundred years to perfect the art kind of

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like semi conductors in Silicon Valley Well it all depends

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on the country's conditions like countries by the ocean Well

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produce or gather seafood right countries with good farmland produce

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awesome corn and greens and stuff Countries with mountains produce

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quell postcards While these conditions specialization a natural advantage lead

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to a concept called comparative advantage Each country does what

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it does best costs for everybody go down well Countries

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end up specialising in particular production like Yolanda and Lulu

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Vania Rather than creating a little of everything they specialize

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and they make a surplus of the things they're good

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at making Well They then export these surpluses to the

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rest of the world With the money they get from

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those exports they could afford to import other products right

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The stuff they didn't produce themselves well These imports are

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relatively cheap because they're being produced in countries that use

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their comparative advantage to produce them at a lower cost

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than they could generally be produced elsewhere Well everyone ends

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up with Mohr of everything And as you know Mohr

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is better We'll think about the good people of your

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clammy and hula Vania Obviously they can't eat yo yo's

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and hula hoops but their lousy farmers and their terrible

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fishermen All they want to do is make Yo yo's

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and or hula Hoop right So gains from trade allow

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them to just do that The two thousand year Agos

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and the sixteen hundred Hula hoops the two of them

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make can get shipped to other countries They can use

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the cash earned to bring in food from the U

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S and cars from Japan and TVs from Korea You

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know anything they want Well those air the short term

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gains from trade Basically it's all about making money You're

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making the most amount of money that you can buy

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specializing But there are some long term gains from trade

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to gains that can't necessarily be measured in bean counting

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or tracking nickels and dimes Kuwait is a small country

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in the Middle East The country doesn't have a lot

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to do with the United States While circa nineteen ninety

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most Americans had no idea that Kuwait even existed But

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Kuwait produced a lot of oil oil Americans used Kuwait

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had a strong trade relationship with us in oil well

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In nineteen ninety Kuwait was invaded by the kindly loving

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generals from Iraq Well rather than just shrug its shoulders

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the U S launched its biggest military effort since Vietnam

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in order to kick Iraq out and restore Kuwait as

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a sovereign nation We'll compare that to what happened Teo

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George Shit Different Georgia In two thousand eight Russia invaded

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the country Did the U S Mount a major military

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effort to save the tiny nation from a Russian invasion

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No why Well Georgia's major exports included hazelnuts and wine

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Yeah doesn't quite get the martial spirit pumping quite like

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crude oil does because Kuwait had a strong trading relationship

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with the US providing a vital commodity that we all

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care about while the U S Was willing to step

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in and protect Kuwait and risk American lives when it

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was invaded While building trade relationships can be like buying

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a friend in the doggy dog world of international relationships

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if Kuwait had just tried to keep itself and not

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sell oil to the U S well it wouldn't have

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been able to talk us into protecting it in its

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big time of need there But let's be really It's

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mostly about money and the stuff money can buy gains

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from trade lead all sorts of material benefits Think about

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your own life because well there are farmers out there

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who grow food and raise animals And because there are

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manufacturers out there who assemble hot pockets and because you're

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able specialize while you have time to get really good

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at playing fortnight So these guys they're good at farming

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and making greasy handheld food products You get great at

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video games Nice trade The farmer in the worker can

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then watch your twitch channel when they get home Yeah

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everyone benefits eventually That's what happened in the post nineteen

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fifties America Instead of making everything other countries finally rebuilt

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themselves after well their destruction in World War two So

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the U S could import better cheaper cars from Japan

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and Korea and elsewhere Cheaper electronics from Taiwan and China

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and other places Cheaper clothes from places like the Philippines

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Latin America cheaper customer service Call talkers from India Better

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music from Britain better actors from Australia So next time

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you watch Hugh Jackman in a movie that has Beatle

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songs on the soundtrack while enjoying it on a big

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screen TV from Korea sitting on a couch made in

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Mexico wearing a full length body snugly made in the 00:07:56.298 --> [endTime] Philippines Well you can think games from trade here

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