ECN 104 Chapter Notes - Chapter 3: Absolute Advantage, Comparative Advantage, Opportunity Cost

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23 Jul 2016
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Chapter 3- Interdependence and The Gains From Trade
Production Possibilities
-A production possibilities frontier shows the various mixes of output that an economy
can produce
-It illustrates one of the ten principles of economics in Chapter 1: People face tradeoffs
Absolute Advantage
Absolute advantage: Comparing the productivity of one person, firm, or nation to that
of another
Opportunity Cost and Comparative Advantage
Opportunity Cost: Whatever must be given up to obtain some item
Comparative Advantage: The comparison among producers of a good according to
their opportunity cost
Comparative Advantage and Trade
-The gains from specialization and trade are based not on absolute advantage but
rather on comparative advantage
-When each person specializes in producing the good for which he or she has a
comparative advantage:
-Total production in the world economy rises
-Each benefits from trade
-By obtaining a good at a price that is lower than his or her opportunity cost of that good
Trade Basics
Imports: Goods and services produced abroad and sold domestically
Exports: Goods and services produced domestically and sold abroad
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