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Chapter 3 Trade.docx

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David Gray

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Chapter 3: Interdependence and Gains From Trade Principle of Comparative Advantage shows that trade can make everyone better off. Farmer and Rancher: these two people can bargain and allocate resources between themselves. Summary • Each person consumes good and services produced by many other people, both in our country and around the world. Interdependence and trade are desirable because they allow everyone to enjoy a greater quantity and variety of goods and services. • there are two ways to compare the ability of two people producing a good. The person who can produce the good in smaller quantity of inputs has an absolute advantage in producing the good. The person who has a smaller opportunity cost of producing the good is said to have a comparative advantage. The gains from trade are based on comparative advantage, n
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