3-1 A Parable for the Modern Economy

• Everyone is capable of benefitting from trade.

Production Possibilities

• A production possibilities frontier showcases all the various mixes of output that an economy can produce. If no trade is present, each person's production possibilities frontier is also their consumption possibilities frontier.

• The amount of goods being produced has an effect on society's rate of trading one good for another.

Specialization and Trade

• Multiple people can benefit from trade consecutively, as trading allows each person to specialize in doing what they do/know best.

  • Ex. Ruby can spend more time raising cattle because that is her speciality, while Frank can dedicate his time to growing potatoes because that's his speciality. By focusing on their specialities while trading, both parties are satisfied and more meat, and potatoes, can be produced without the hassle of extra work hours for either party.

3-2 Comparative Advantage: The Driving Force of Specialization

Absolute Advantage

• A producer is at an absolute advantage when a smaller quantity of inputs produce a good.

• Absolute advantage: the ability to produce a good using fewer inputs than another producer.

Opportunity Cost and Comparative Advantage

• A trade-off between the two goods that each producer faces is measured by the opportunity cost.

• Opportunity cost: whatever must be given up to obtain some item.

• Comparative advantage: the ability to produce a good at a lower opportunity cost than another producer.

• It is impossible for one person to hold the comparative advantage for two goods but it is possible for said person to have an absolute advantage.

Comparative Advantage and Trade

• Comparative advantages give rise to specialization and trade. When someone is able to specialize in producing goods, they're at a comparative advantage. This brings rise to the overall production in the economy.

The Price of the Trade

• When trading, if both groups would like to gain from it, they'd have to have a balanced price that lies between their opportunity costs.

• Prices are often set at a certain range that'll satisfy both parties.

  • Ex. For a trade to be advantageous, a price between 2 and 4 would suit both parties best.

• Adam Smith wrote in his 1776 novel, The Wealth of Nations, analyzing the role of trade and economic independence.

• David Ricardo, a millionaire stockbroker, was inspired by Adam Smith. Ricardo later wrote On the Principles of Political Economy and Taxation in 1817. He then developed the principle of comparative advantage, which became the starting point for modern economics as we know it today.

3-3 Applications of Comparative Advantage

• Comparative advantage allows for independence and gains when it comes to trade.

Should LeBron James Mow His Own Lawn?

• LeBron is better off paying Kaitlyn more than $50 (what would be offered at McDonald's) but less than $30,000 (what LeBron would earn from filming a television commercial), so he can film his commercial and Kaitlyn can earn money for mowing his lawn. They both end up winning.

Should the United States Trade with Other Countries?

• Imports: goods produced abroad and sold domestically.

• Exports: goods produced domestically and sold abroad.

• International trade brings more peace and prosperity to all countries.