How does the fact that many goods are nontraded affect the extent of possible gains from trade?
Answer:
It is so simple. Through trade you get the best deal in the international market. Your cost of getting something for investment or consumption is the least when you buy at lowest cost supplier that gurantees qualty internationally. The domestic producer has to compete internationally to produce and sell in the market. This is how countries gain through free international trade. But some good are not tradeable and not traded. For example, you cannot trade in civic ervices that you buy from the local administration/ municipality. Similarly, in most countries it is difficult to trade in electricity internationally (electricity cannot be stored: it has to be used as iy is generated and lomg distance transmission is costly. Many goods like bread, repair services, plumbing services, hotels/ rstaurants and mall services are location specific and are not traded internationally. For various reasons many countries keep their countries closed to foreign trade in respect of many specified items.
Once these restrictions apply, the gains cannot accrue.
Also, read The Balassa-Samuelson effect is either of two related things:
The observation that consumer price levels in wealthier countries are systematically higher than in poorer ones (the "Penn effect").
An economic model predicting the above, based on the assumption that productivity or productivity growth-rates vary more by country in the traded goods' sectors than in other sectors (the Balassa-Samuelson hypothesis).--search Yahoo.
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