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
• 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