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

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22 Oct 2012
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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.

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