ECON 102 Lecture Notes - Lecture 3: Comparative Advantage, Absolute Advantage, Opportunity Cost

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9 Feb 2017
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Interdependence and the Gains from Trade
Comparative Advantage: The Driving Force of Specialization
absolute advantage the ability to produce a good using fewer inputs
than another producer
opportunity cost whatever must be given up to obtain some item
comparative advantage the ability to produce a good at a lower
opportunity cost than another producer
trade can benefit everyone in society because it allows people to
specialize in activities in which they have a comparative advantage
general rule
o for both parties to gain from trade, the price at which they trade
must lie between the two opportunity costs
when each party specializes in productions of the products they have
an advantage in, more products are produced overall, helping all
parties due to trade
Applications of Comparative Advantage
imports goods produced abroad and sold domestically
exports goods produced domestically and sold abroad
principle of comparative advantage states that each good should be
produced by the country that has the smaller opportunity cost of
producing that good
international trade can make some individuals worse off, even as it
makes the country as a whole better off
Summary
each person consumes goods and services produced both in the US
and around the world
interdependence and trade are desirable because they allow everyone
to enjoy a greater quantity and variety of goods and services
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