Topic 3: Comparative Advantage and Gains from Trade

Why do people trade?

When everyone specializes in the production of goods and services and trades with others, we have more access to more choices and a higher standard of living

Per unit of opportunity cost=

opportunity cost/units gained

when calculating opportunity cost we ______ what we _____ ______

give; get down

absolute advantage

the producer that can produce the most output or requires the lease amount of input/resources

comparative advantage

the producer with the lowest opportunity cost

which good should a country specialize in?

the one that is cheaper from them to produce in which they have a lower opportunity cost/comparative advantage.

Output question

the amount of input are the same but the output of each are different

OOO

output, other goes, over

Input question

the amount of output is the same but the input is different

IOU

input, other goes, under

Terms of Trade

the agreed upon conditions that benefit both countries