Chapter+3+Independence+and+the+Gains+from+Trade+(Joon,+Scott,+and+Steven)

= Interdependence and the Gains from Trade = = = = Key Terms =


 * Absolute Advantage:** the ability to produce a good using fewer inputs than another producer.
 * Opportunity Cost:** whatever must be given to obtain some item.
 * Comparative Advantage:** the ability to produce a good at a lower opportunity cost than another producer.
 * Imports:** goods produced abroad and sold domestically.
 * Exports:** goods produced domestically and sold abroad.

= Key Concepts =

Production Possibilities
In this concept, we have seen a similar one in chapter two. The production possibility frontier comes into play in this part of the section. Lets take an example. Imagine a firm that sells both pens and pencils. Lets say that the firm can make a pen every 20 minutes and a pencil every 10 minutes. If the firm works only eight hours a day, the firm can only produce a certain number of goods. As a result, the production possibility frontier comes into play as there is a cost of making either a pen or a pencil.

**Specialization and Trade**
Imagine that the same firm has a competitor who produces a pen every 60 minutes and a pencil every 15 minutes. In this case, no matter what the competitor does, it may seem hopeless to even contend with the other firm. However, there is a solution that will benefit both firms. Specializing in what a firm does best and trading to enhance their profits will benefit both the firms even though one firm is obviously better than the other. This is where absolute and comparative advantage comes in. Although the first firm has the absolute advantage, the other firm has the comparative advantage. In trade, all that matters is the comparative advantage as the firm can specialize in the good that they have a comparative advantage in.

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= Conclusion = -Goods, imported or exported, are desirable as they let people enjoy greater amount of services and a larger variety. -There are two ways to classify two firms based on their ability to produce. -One is absolute advantage which is that the firm can produce a good with smaller amount of input. -Another is comparative advantage which is that the firm can produce a good which has a smaller opportunity cost. -We use comparative advantage when trading. -Trade is beneficial to all as it allows specialization.

= Study Questions = 1. When looking at the benefits of trade, why doesn't absolute advantage matter? 2. How does trade allow specilization? 3. Why do economists prefer free trade among nations?

Student produced resource: [|Quizlet Chapter 3]