Every day, people rely on each other whether they know each other or not, by providing goods and services that everyone needs. This is possible because people and countries trade for each other’s better-off. People provide you and other consumers with the goods and services not because they’re generous or something, it’s because they get something in return.

People trade because they allow everyone to enjoy a greater quantity and variety of goods and services. Trade makes everyone better off because it allows people to specialize in those activities in which they have a comparative advantage. They become able to produce outside of
their production possibility graph.

-Specialization and Trade

Specialization helps countries and firms produce goods and services with a higher level of production efficiently. The surpluses produced can be traded with the surplus of others so that both can gain better-off. By specializing in a good or service where there’s in either absolute or comparative advantage, there’s an overall gain in welfare.

-Absolute Advantage

->The ability to produce a good using fewer inputs than other producers
If a country or firm has an absolute advantage over its trading partners, it means that they are able to produce more goods or services with the same amount of resources, or produce the same amount of goods with less resources.

-Comparative Advantage

->The ability to produce a good at a lower opportunity cost than another producer
If a country or firm has a comparative advantage over its trading partners, it means that they can produce a good or service at a lower opportunity cost than its trading partners. Countries or firms usually export the good that they have comparative advantage on, and import the good that they don’t have comparative advantage.
(Import->Goods produced abroad and sold domestically/ Export->Goods produced domestically and sold abroad)

Lets look at a simple economy


1. What does trade allow?
Answer- it alows a country to consume beyond its production possibilities frontier. Without trade, you can only consume inside the PPF

2. If it takes Chinese workers fewer hours to produce every good than it takes Russian workers, can China still gain profit from trading with Russia?
Answer-Yes because it can gain comparative advatnage

3. How can a country's consumption possibilities frontier be outside of the PPF curve?
Answer- When they start with other countries
Multiple Choice:

4. What are the two different PPF curves?
Bowed curve and straight line curve

5. What do the two different curves show?
*Bowed curve shows augmenting opportunity cost.
*Straight line curve shows stable opportunity cost.