Research
BPEA | 1983 No. 11983, No. 1
FREE INTERNATIONAL TRADE rests on the principle of comparative advantage. By engaging in trade, a nation can benefit from specializing in the production of goods in which it is relatively more efficient and exchanging them for those in which other nations excel. Provided its cost levels are appropriately adjusted by exchange rate changes or monetary flows, the nation will be sufficiently competitive to pay for its import needs. Over time, comparative advantage may shift, however, and in principle an economy might lose its comparative advantage in an entire sector. Indeed, it is widely believed that the U.S. manufacturing sector is in the process of just such a decline-developed countries have become increasingly competitive with U.S. firms at the upper end of the technology spectrum while developing countries have penetrated the markets of those firms making more standardized products.
