Comparative Advantage and International Trade Benefits

Mutually Beneficial Trade

Trade that allows each country to take advantage of lower opportunity costs in the other country.

Comparative Advantage

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

Absolute Advantage

The ability of a country to produce more of a good with the same amount of resources than another country.

Point A

The point on the graph where countries start producing and consuming before trade.

Point B

The point on the graph where countries end up after trade.

Intra-Industry Trade

International trade of goods within the same industry.

Division of Labor

The separation of tasks in production to improve efficiency and productivity.

Gains from International Trade

Benefits that countries receive from engaging in trade, resulting from pursuing comparative advantage.

Opportunity Cost

The loss of potential gain from other alternatives when one alternative is chosen.

Value Chain

The series of stages involved in producing a good, from conception to delivery.

Specialization

The process of focusing on a specific task or product to increase efficiency and skill.

Learning and Innovation

The development of unique skills and knowledge that occurs through specialization.

Economies of Scale

Cost advantages that enterprises obtain due to the scale of operation, with cost per unit of output generally decreasing with increasing scale.

Camping Example of Comparative Advantage

A scenario where friends coordinate their efforts based on their individual strengths to maximize output during a camping trip.

High-Income Economies

Countries with a high gross national income per capita, such as the United States, Canada, and Japan.

Trade Between Similar Economies

Trade that occurs between economies with similar opportunity costs, which is common despite the theory suggesting trade should occur between dissimilar economies.

Productivity Disadvantage

The area of production where an individual or country is less efficient compared to others.

Coordination of Efforts

The process of organizing and aligning individual contributions to achieve a common goal.

Output

The total amount of goods produced by a company, group, or economy.

Skills Development

The process of acquiring new skills or improving existing skills through practice and experience.

Economies of Scale

The concept that allows one or two large producers to supply the entire country, leading to lower average production costs.

Competition

The presence of multiple producers in the market, providing variety for consumers.

Variety

The availability of different products for consumers in the market.

Average cost of production per toaster oven

Production plant S = $30, Production plant M = $20, Production plant L = $10, Production plant V = $10.

Economies of Scale Example

Production plant M can produce toaster ovens more cheaply than plant S due to economies of scale.

Output level of economies of scale

The economies of scale end at an output level of 150.

Plant V vs Plant L

Plant V, despite being larger, cannot produce more cheaply on average than plant L.

Tariffs

Taxes that governments place on imported goods.

World Trade Organization (WTO)

An organization committed to lowering barriers to trade and facilitating negotiations between nations.

Benefits of Reducing Barriers to International Trade

Low-income countries benefit more from trade than high-income countries.

Small gains from trade

Even a small gain is significant as it persists each year into the future.

Unmeasured gains from trade

Estimates of gains may be low because some gains are not measured well in economic statistics.

Advantages of product variety

Difficult to measure the advantages to consumers of having a variety of products available.

Knowledge transfer in trade

Trade often involves a transfer of knowledge in production, technology, management, finance, and law.

Absolute advantage

When one country has more resources or more productive resources to produce a good compared to another country.

Gain from trade

A country that can consume more than it can produce as a result of specialization and trade.

Splitting up the value chain

Many of the different stages of producing a good happen in different geographic locations.

Value chain

How a good is produced in stages.