Econ 1.4 Comparative Advantage and Trade
Gains from Trade
- Better standard of living for everyone is trade
- Gains arise from specialization
- The reason we have an economy
Who made your shoes? What have you eaten today? Who grew the food you ate?
Comparative Advantage
Trading partner can both benefit if they specialize and trade based upon comparative advantage.
The total output will be greatest when each good is produced by the economy with the lower opportunity cost.
Whoever gives up the least for producing something should make it.
The basic principle of comparative advantage rests on differing opportunity cost of producing various goods and services.
Absolute Advantage
Country that produces the most of a good.
Output vs. Input
Output problem - resources fixed
With the same resources, who can make more?
Input problem - output fixed
Who uses the fewest resources to make the same number of goods?
Input
US
Info - (abs) 1000 m, (abs) 1000 s
Medicine (m) - (comp) 1 m = 1 s
Shirts (s) - 1 s = 1 m
Trade
Both parties get more than they do on their own.
Bang
info - 250 m, 750 s
Medicine (m) - 1 m = 3 s
Shirts (s) - (comp) 1 s = 1/3 m