Trade and Comparative Advantage

Flashcards summarizing key concepts of trade and comparative advantage based on the notes provided.

Production Possibilities Frontier (PPF)

A curve showing the maximum combinations of two goods an economy can produce given resources and technology.

Inefficient production

Occurs when production is inside the PPF.

Efficient production

Occurs when production is on the PPF.

Unattainable production

Occurs when production is outside the PPF.

Bowed outward PPF

The shape of the PPF, indicating increasing opportunity cost.

Absolute Advantage

A country or individual can produce more of a good with the same resources compared to others.

Comparative Advantage

A country or individual has a lower opportunity cost of producing a good.

Basis for trade

Trade benefits both parties if they specialize in their comparative advantage, even if one has absolute advantage in both goods.

Gains from Trade

Both parties can consume beyond their PPF through specialization and exchange.

Who gains from trade?

Across countries, each specializes in goods where they hold comparative advantage; within countries, gainers may be export industries, while losers may be import-competing industries, but society overall gains.