ECON101 Lecture Notes - Lecture 3: Comparative Advantage, Absolute Advantage, Opportunity Cost

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9 Feb 2016
Department
Course
ECON 101 – Lecture 3 – Gains from Trade
Interdependence
In modern society, individuals rely on other people to provide them with the goods and
services they use
These goods and services are usually produced in other parts of the world
Trade
Trade makes everyone better off
We will analyze two trading situations:
oA country does not participate in trade (self-sufficient)
oA country participates in trade with another country
International Trade
Exports refer to the goods and services which were produced domestically and are sold
abroad
Imports refer to the goods and services which were produced abroad and are sold
domestically
Gains From Trade
Absolute advantage refers to the ability of one producer to produce goods and services
using fewer resources than another producer
oIf two parties participate in a trade, they would both gain from the trade if each
party has an absolute advantage in their good or service and specializes in that
good
Comparative advantage refers to the ability of one producer to produce goods and
services at a lower opportunity cost than another producer
oIf two parties participate in a trade, they would both gain from the trade if each
party specializes in the good it produces with the lowest cost
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