Interdependence+and+the+gains+from+trade+kelj



=**Specialization and Trade**= By specializing in production, and by trading with other countries, it is possible for countries to increase their incomes. media type="google" key="-6829294558385059692&hl=en&fs=true" width="400" height="326" http://video.google.com/videosearch?q=specialization%20in%20trade&ie=UTF-8&oe=utf-8&rls=org.mozilla:en-US:official&client=firefox-a&um=1&sa=N&tab=wv# media type="google" key="235925283402291517&hl=en&fs=true" width="400" height="326" http://video.google.com/videoplay?docid=235925283402291517&ei=bwzySJLsCImSwgP2uNm9Dg&q=specialization+economics

=**Absolute Advantage & Comparative Advantage**= http://www.bized.co.uk/virtual/dc/diagrams/cadv.gif Country A has an **absolute advantage** in the production of both maize and wheat. At all points its production possibility curve lies right above to that of Country B. Due to abundance of raw materials or more productively efficient production techniques, Country A is able to produce more wheat and more maize that Country B. Perhaps common sense tells us that Country A should produce both goods and export surpluses and Country B neither. However, when **comparative advantage** is considered a different story emerges. Consider the opportunity cost of Country A producing one more unit of maize. Half a unit of wheat has been foregone. When country B produces one more unit of maize two units of wheat are foregone. Economics is concerned with the allocation of scarce resources. Fewer resources are foregone if Country A concentrates its resources in the production of maize. Now consider the opportunity cost of Country B producing one more unit of wheat. Two units of maize have been foregone. When Country B produces one more unit of wheat only half a unit of maize is foregone. Fewer resources are foregone if Country B specializes in the production of wheat. In the above case Country A should produce maize and Country B wheat. The surpluses produce should then be traded.
 * Absolute Advantage**: The ability of a country, individual, company or region to produce a good or service at a lower cost per unit than the cost at which any other entity produces that good or service.
 * Comparative Advantage**: A situation in which a country, individual, company or region can produce a good at a lower opportunity cost than a competitor.


 * Although it is possible for one person to have an absolute advantage in both goods, it is impossible for one person to have a comparative advantage in both goods. Because the opportunity cost of one good is the inverse of the opportunity cost of the other, if a person's opportunity cost of one good is relatively high, the opportunity cost of the other good must be relatively low.


 * The gains from specialization and trade are based not on absolute advantage but on comparative advantage. When each person specializes in producing the good for which he or she has a comparative advantage, total production in the economy rises. This increase in the size of the economic pie can be sued to make everyone better off.

=**International Trade**= http://nobelprize.org/educational_games/economics/trade/images/trade_chart1.gif In this case, neither country has specialized in producing more of one of the two particular products - both countries produce about the same number of jeans and cell phones.
 * Imports**: products in from abroad
 * Exports**: the selling of goods to other countries

http://nobelprize.org/educational_games/economics/trade/images/trade_chart2.gif Country A - having more capital than labor - has specialized in producing more cell phones. Country B - having more labor than capital - has specialized in producing more jeans. In this case, trade may benefit both countries involved.

=**Questions**= 1. The small island nation of Jennifernia is populated by two farmers, Alf and Barney. Each farmer has 100 acres. The land can be used either for growing wheat or as pasture for beef cattle. Alf's land is better than Barney's land. Each acre that Alf plants to wheat will yield 50 bushels of wheat per year. Each acre that Alf devotes to pasture will yield 70 pounds of beef per year. Each acre that Barney plants to wheat will will yield 25 bushels of wheat per year and each acre that Barney devotes to pasture will yield 30 pounds of beef per year. (a) Alf's farm has absolute advantage in the production of beef and comparative advantage in the production of wheat. (b) Barney's farm has comparative advantage in the production of beef. (c) Barney's farm has comparative advantage in the production of wheat. (d) Alf's farm has comparative advantage in both beef and wheat. (e) More than one of the above statements is true.

2. The diagram shows the production possibility frontier for two countries (the UK and Italy) producing two goods, freezers and dishwashers. From the information provided it can be deduced that . (a)The UK has an absolute advantage in both goods (b)The UK has a comparative advantage in producing freezers and Italy has a comparative advantage in producing dishwashers (c)The UK has a comparative advantage in producing dishwashers and Italy has a comparative advantage in producing freezers (d)There is no comparative advantage for either country in the production of the two goods shown

Answers for chp.3 Interdependence and the gains from trade kelj