FMSC 290 Chapter Notes - Chapter 3: Absolute Advantage, Comparative Advantage
1 May 2018
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Chapter 3 – Interdependence and the Gains from Trade
• * Without trade, a country just consumes what it produces
• +, - Find out how much of one good they can produce by dividing the amount of labor
hours by the amount of hours it takes to produce that good
• * Exports – goods produced domestically and sold abroad
• * Imports – good produced abroad and sold domestically
• * Trade makes both parties/countries/individuals better off
• * Absolute advantage – produce a good using less input costs than another producer;
measures the cost of a good in terms of the inputs required to produce it
o + If each country has an absolute advantage in one good and specializes in that
good, then both countries will benefit or gain from trade
o + Countries can benefit from trade when each specializes in the good it produces
at lowest cost
• + Comparative advantage – the ability to produce a good at a lower OC than another
producer
o + Absolute advantage is not necessary for comparative advantage because
comparative advantage is also looking at opportunity costs
o + Gains from trade arise from comparative advantages; when each country
specializes in the goods in which it has a comparative advantage, the total
production in all countries is higher and all countries will benefit and gain from
trade; this also applies to individuals
• * Interdependence and trade allow everyone to enjoy a greater quantity and variety of
goods and services
• To summarize, when people or countries specialize in the goods in which they have a
comparative advantage in, the economic pie as we call is grows and trade makes
everyone better off
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