Chapter 3 - Interdependence and the Gains from Trade

economic interdependence

reliance between countries or people to provide goods and services

trade makes everyone better off as…

allows countries to specialize in what they do best, leading to increased efficiency and a greater variety of goods and services

absolute advantage

ability to produce a good using fewer inputs than another producer (according to productivity)

comparative advantage

ability to produce a good at a lower opportunity cost than another producer

is it possible for one person to have an absolute advantage in both goods?

yes, but does not mean they have a comparative advantage (they are unrelated)

is it possible for one person to have a comparative advantage in both goods?

no, because comparative advantage requires different opportunity costs for each good

gains from specialization and trade are based on…

comparative advantage

gains from specialization and trade include…

total production increase, resulting in a bigger economic “pie” for all parties involved

what determines the price at which trade takes place?

for both parties to gain from trade, the price at which they trade must lie between the two opportunity costs

imports

goods and services produced abroad and sold domestically

exports

goods and services produced domestically and sold abroad