Question

Australia is a major producer of agricultural and dairy products and exports coffee, tea, spices, and milk products to the United States. United States is the world's third largest supplier of machinery and exports heavy machinery to Australia. What explains the trade equation between Australia and the United States?

Answer 1

Answer: Nations with an absolute advantage in producing certain goods trade them for goods produced by other countries

Explanation: Economists have developed the idea of absolute advantage and relative advantage in producing and show with simple arithmetic equations that economies with absolute and advantage and relative advantage do well when they trade their products. It is as simple as seeing how economies open to the world do better that the ones imposing restrictions to trade.