Trade Gains:

The term gains from trade basically used to refer to the net benefits that countries experience as a result of lowering import tariffs and otherwise liberalizing trade. Gains from trade are possible when the world price of a good is different from the price determined by the intersection of the domestic demand and the domestic supply. If the world price is above the domestic no-trade price, producers will tend to expand production to supply in the export market, and the producer surplus will be larger than it would be in if there was no trade. It can be noted that consumers will face higher prices and experience a smaller consumer surplus, but the gain to the producers will be larger than the loss to the consumers. If the world price is below the domestic no-trade price, the consumer surplus will be larger and the producer surplus will be smaller than it would be in the absence of trade. But the gain to the consumers is greater than the loss to the producers. In other words the benefits that accrue to each party to a transaction over and above the benefits each would have derived from producing the goods or services themselves. Hence it refers to the advantages which a country gets from trading with other countries: firstly the economies of scale when large amounts are produced and secondly the exchange of commodities between countries which means the certain countries can specialize in certain commodities making them cheaper. Gains from trade can be broken down into two sources, namely gains from exchange which implies that countries have different endowments with goods or different preferences, and gains from specialization which implies that countries specialize with respect to the production of goods.