ECN 104 Chapter Notes - Chapter 3: Absolute Advantage, Comparative Advantage, Opportunity Cost
Document Summary
Interdependence everyday you rely on many people around the world to provide you with goods and services (farmer and rancher example page 52) Absolute advantage: the comparison among producers of a good according to their productivity. Opportunity cost: whatever must be given up to obtain some item. Comparative advantage: comparison among producers of a good according to their opportunity cost: the ability to produce a good at a lower opportunity cost than another producer. Gains from trade arise from comparative advantage (differences in opp. costs) When each country specializes in the good(s) in which it has a comparative advantage, total production in all countries is higher, the world"s economic pie is bigger, and all countries can gain from trade. One general rule: for both parties to gain from trade, the price at which they trade must lie b/w 2 opportunity costs. Exports: goods produced domestically and sold abroad: to sell domestically produced goods abroad.