Comparative Advantage and Trade (Vocabulary)

Vocabulary flashcards covering key terms from the lecture on gains from trade, division of labor, specialization, PPC, opportunity cost, and comparative/absolute advantage with examples.

Gains from Trade

The net benefits that arise when individuals or nations specialize and trade, allowing more output and higher welfare than self-sufficiency.

Division of Labor

The separation of tasks among individuals to increase productivity; a concept popularized by Adam Smith in The Wealth of Nations.

Specialization

When individuals or countries focus on producing a narrow range of goods to improve efficiency and facilitate trade.

Production Possibilities Curve (PPC)

A model showing the maximum feasible combinations of two goods an economy can produce with given resources, used to illustrate opportunity costs and gains from trade.

Opportunity Cost

The value of the next-best alternative forgone when choosing to produce or consume one good over another.

Comparative Advantage

The ability to produce a good at a lower opportunity cost than others, forming the basis for beneficial trade.

Absolute Advantage

The ability to produce more of a good with the same resources and time than others.

Mutually Beneficial Terms of Trade

The range of exchange rates for a good that makes both trading partners better off, lying between each side's opportunity costs.

Terms of Trade

The rate at which one good can be exchanged for another in a trade.

Trade

The exchange of goods and services that allows specialization and higher overall welfare.

The Wealth of Nations (1776)

Adam Smith's seminal work that argued for division of labor and efficiency gains from trade.

Mutual Gains from Trade

Both trading partners benefit when they specialize according to comparative advantage and trade at a price within their opportunity-cost ranges.

Absolute vs Comparative Advantage in Trade

Absolute advantage is producing more with the same resources; comparative advantage depends on lower opportunity costs, guiding who should specialize to achieve gains from trade.