EC120 Lecture Notes - Lecture 22: Absolute Advantage, Autarky, Comparative Advantage
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Without trade- each person produces all goods themselves: extreme case of autarky (no trade, obviously not optimal. Trade allows specialization- among people, regions, countries: people, regions or countries can specialize in producing goods that they produce most efficiently, trade and specialization work together. Absolute advantage: when one trading partner can produce a good using fewer inputs than another partner, one partner may have an absolute advantage in all goods. Comparative advantage: when one trading partner can produce a good at a lower opportunity cost than another partner, each trading partner has to have a comparative advantage. If each country specializes according to comparative advantage, total production increases. How can trade increases output, even if costs are identical across countries specialize. Economies of scale: production is more efficient if countries specialize. Wednesday november 29th 2017: much more important for smaller countries. Learning by doing: productivity increases with greater production over time. Terms of trade- export prices divided by import prices.