Specialization and Exchange

Absolute Advantage

The entity that can produce the most given a certain amount of resources.

Opportunity Cost

The entity that gives up the least to produce a good; produces something at a

lower opportunity cost.

Autarky

When an entity produces exactly what it consumes. Also called self-sufficiency.

Specialization

When the goods an entity produces are not the same as what that entity consumes.

Finding Comparative Advantage:

If a person (or country or company) can do either X units of Boats or Y units of Cars then you want to structure your opportunity costs calculations.

If you are looking for the opportunity cost of 1 Car:

X Boats/Y Cars = The number of Boats given up per Car Produced.

If you are looking for the opportunity cost of 1 Boat:

Y Cars/X Boats = The number of Cars given up per Boat Produced

Some points on Trade:

• Trade allows for specialization.

• Specialization increases production.

• Trade allows people to consume more than they could have if they were having to make everything themselves.

• Trade can benefit both parties