1. Chapter 3 Interdependence and the Gains from Trade

2. Ten Principles of Economics Trade can make everyone better off

3. Parable for the Modern Economy Two goods in the world: meat & potatoes; Two people in the world: rancher & farmer Should they trade? What if one was better at doing both?

4. Production Possibilities Shows various mixes of output that an economy can produce Linear PPF shows tradeoffs at constant rate Table 3-1 & Figure 3-1

5. Specialization and Trade Can they both benefit from trade? Trade allows them to consume at point outside their PPF

6. Absolute Advantage Being able to produce a good with a smaller quantity of inputs than someone else

7. Opportunity Cost & Comparative Advantage Opportunity Cost: Whatever must be given up to obtain some item - measures the trade-off between 2 goods Comparative Advantage: ability to produce a good at a lower opportunity cost than another producer - can have an absolute advantage in both goods, but not to have comp. adv. in both

8. Comparative Advantage & Trade Gains from specialization & trade are based on comparative advantage When people produce good in which they have a comp. adv., total production rises in the economy making everyone better off

9. Price of Trade For both parties to gain from trade, the price at which they trade must lie between the two opportunity costs

10. Applications of Comparative Advantage Should US trade with other countries? Imports vs. Exports