Chapter 3: Interdependence and the Gains from Trade

Absolute Advantage

The ability to produce a good using fewer inputs than another person.

Comparative Advantage

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

Interdependence

________ is only possible due to Trade.

Ruby

To summarize, trade allows Frank and ________ to attain a combination of goods that would be impossible without trade.

producer

The ________ who gives up less of other goods to produce Good X has the smaller opportunity cost of Good X.

Ruby

________ needs 10 minutes to produce an ounce of potatoes and 20 minutes to produce an ounce of meat.

Suppose an economy only has two goods

meat and potatoes

There are also only two producers

Ruby, a cattle rancher, and Frank, a potato farmer

By trading, people would not need to be self-sufficient

Ruby would not have to eat meat all the time, and Frank would also not have to eat potatoes for every meal

Opportunity Cost

Whatever must be given up in order to obtain an item.

The Price of the Trade

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

Interdependence

Only possible due to Trade.

Why do people Trade?

To enjoy a greater variety of goods and to specialize in production of a certain good