Chapter+3-+Interdependence+and+The+Gains+From+Trade+(09-10)



This chapter focuses on the importance of trade among nations. Trade makes everyone better off because it allows people to specialize in those activities in which they are good at. 

**Terms To Keep in Mind:**  Absolute Advantage - The ability to produce a good using fewer inputs than another producer 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 Imports - Goods produced abroad and sold domestically Exports - Goods produced domestically and sold abroad

- In order to trade, people must know each others' //tastes// to make both sides win.

- To find the cost of producing goods is to compare the inputs required to produce them. - It is possible for one company or person to have an absolute advantage in both good. - It is possible for one company or person to have a comparative advantage in both good.
 * Comparative Advantage: The Driving Force of Specialization**

There are two types of advantages: Comparative & Absolute - The producer that requires smaller quantity of inputs to produce a good has an **absolute advantage** in producing the good.

//Let's look at an example:// TABLE A Here, the United States has an absolute advantage in producing shoes, while Canada has an absolute advantage in producing shirts.
 *  || Shoes || Shirts ||
 * United States || 100 || 75 ||
 * Canada || 80 || 100 ||
 * <span style="font-family: Verdana,Geneva,sans-serif;">Total || <span style="font-family: Verdana,Geneva,sans-serif;">180 || <span style="font-family: Verdana,Geneva,sans-serif;">175 ||

- The producer who gives up less of other foods to produce a product, has the smaller opportunity cost of producing the product and has a **comparative advantage** in production. - The comparative advantage reflects the relative **opportunity cost**.

First, the opportunity cost is this: media type="youtube" key="pWE7WDZC-lQ" height="344" width="425" align="center"

//Let's look at an example:// <span style="font-family: Verdana,Geneva,sans-serif;"> TABLE C <span style="font-family: Verdana,Geneva,sans-serif;">From this example, we can infer that the United States has a comparative advantage in producing shoes, and Canada has a comparative advantage in producing shirts. - If the United States produced only shoes, the opportunity cost would be 80 units of shirts to earn 100 units of shoes. - If Canada produced only shoes, the opportunity cost is producing 75 units of shirts to earn 80 units of shoes. - When we compare these two opportunity costs, for United States, the opportunity cost of producing shirts is higher, and for Canada, producing shoes is lower.
 * <span style="font-family: Verdana,Geneva,sans-serif;"> || <span style="font-family: Verdana,Geneva,sans-serif;">Shoes || <span style="font-family: Verdana,Geneva,sans-serif;">Shirts ||
 * <span style="font-family: Verdana,Geneva,sans-serif;">United States || <span style="font-family: Verdana,Geneva,sans-serif;">100 || <span style="font-family: Verdana,Geneva,sans-serif;">80 ||
 * <span style="font-family: Verdana,Geneva,sans-serif;">Canada || <span style="font-family: Verdana,Geneva,sans-serif;">80 || <span style="font-family: Verdana,Geneva,sans-serif;">75 ||
 * <span style="font-family: Verdana,Geneva,sans-serif;">Total || <span style="font-family: Verdana,Geneva,sans-serif;">180 || <span style="font-family: Verdana,Geneva,sans-serif;">155 ||

media type="youtube" key="GJYo8F6EeLU" height="344" width="425" align="center"

- When each person specializes in one production in which they have comparative advantage for, production in the economy rises. - Trade can benefit everyone in society because it allows people to specialize in activities in which they have a comparative advantage.
 * Back to Trade and Comparative Advantage:**

<span style="display: block; font-family: Verdana,Geneva,sans-serif; text-align: center;"> How can trade benefit both sides? media type="youtube" key="q-bRZdR68Uc" height="344" width="425" align="center"

<span style="font-family: Verdana,Geneva,sans-serif;"> There are two types of trade: **Import** & **Export** - More will be discussed in later chapters.

In Conclusion: <span style="font-family: Verdana,Geneva,sans-serif;">
 * <span style="font-family: Verdana,Geneva,sans-serif;">Each person consumes goods and services produced by many other people both in our country and around the world.
 * <span style="font-family: Verdana,Geneva,sans-serif;">Interdependence and trade are desirable because they allow everyone to enjoy a greater quantity and variety of goods and services.
 * There are two ways to compare the ability of two people producing a good.
 * The person who can produce a good with a smaller quantity of inputs has an absolute advantage.
 * The person with a smaller opportunity cost has a comparative advantage.
 * The gains from trade are based on comparative advantage, not absolute advantage.
 * Trade makes everyone better off because it allows people to specialize in those activities in which they have a comparative advantage.
 * The principle of comparative advantage applies to countries as well as people.

<span style="font-family: Verdana,Geneva,sans-serif;">** Bibliography 3 **