CHAPTER+3+.+INTERDEPENDENCE+AND+THE+GAINS+FROM+TRADE+;)

=**Interdependence and the gains from Trade** = 

PRODUCTION POSSIBILITIES
 Assume that Rachel and Daniel each work 8 hours per to produce cell phones, MP3 players, or both. Rachel can produce one MP3 player in 60 minutes, and cellphones in 15 minutes. Daniel, who is more productive in producing both products, can produce one MP3 player in 20 minutes, and one cellphone in 10 minutes. The right side of the table shows how much Rachel and Daniel could produce each product if they worked for 8 hours in producing only one of the two goods. The graph of each Rachel and Daniel’s PPfs illustrates one of the //Ten Principles of Economics// in Chapter 1: PEOPLE FACE TRADE-OFFS. They need to give up their productions of one good or the other in order to produce something else.

SPECIALIZATION AND TRADE
Specialization helps different countries to decide on which product they should produce more. Surplus produced in a certain country could be traded for a different surplus good in another country. The traders decide on whether they should export or import goods depending on the comparative and absolute advantages.

ABSOLUTE ADVANTAGE
 One has an absolute advantage when he/she needs a smaller quantity of inputs to produce a good than the other producer.

 - In this case, country A has an absolute advantage in the production of both wheat and maize, as it requires less resources to produce both goods.

COMPARATIVE ADVANTAGE
 One has a comparative advantage when he/she has a lower opportunity cost in producing certain goods.



- In this case, empire A has a comparative advantage in good L, and empire B has one in good N.

HOW TRADE WORKS?
 Looking at the graph above (Comparative Advantage), empire A would export good L since they have a comparative advantage in it. At the same time, empire B will export good N, since they have a comparative advantage in that one. Both empires are better off trading goods in this case, since each of them are obtaining goods that they do not have a comparative advantage in.

= = = //GLOSSARY// =

* Absolute advantage: Ability to produce a good using fewer inputs than another producer.


 * Comparative advantage: Ability to produce a good at a lower opportunity cost than another producer.

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