ECON 208 Chapter Notes -Absolute Advantage, Comparative Advantage
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ECON 208 Full Course Notes
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Open economy: an economy that engages in international trade. Closed economy: an economy that has no foreign trade. With trade, people can specialize efficiently and satisfy other needs by trading. This basic principle is true for individuals, regions and countries. Gains from trade: the increased output due to the specialization according to comparative advantage that is made possible by trade. 2: country 1 has absolute disadvantage in production of both goods. 0. 6 ayogs: country 1 has a comparative advantage in production of ayogs, country 2 has a comparative advantage in production of widgets. Each specializes in production more in its area of comparative advantage. 1. 67 widgets: country 1 shifts 10 units of resources from widgets to ayogs, country 2 shifts 1 unit of resources from ayogs to widgets. Combined +50: so no change in resources used, but combined world output has increased for both.
