Comparative Advantage and Trade. Vocabulary Trade: dividing tasks Gains From Trade: By dividing tasks the people involved can each get more of what they.

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Presentation transcript:

Comparative Advantage and Trade

Vocabulary Trade: dividing tasks Gains From Trade: By dividing tasks the people involved can each get more of what they want. Gains from trade arise, in particular, from the division of tasks, economics call this specialization: different people both engage in different tasks. Comparative advantage: The production cost is lower for the individual than for others. Absolute Advantage: producing more output with a given amount of input.

Comparative Advantage and Gain from Trade Say Tom is stranded on a deserted island, and Hank, another castaway, just so happens to wash a shore. Could they both benefit from trading with each other? Its an obvious scenario if both Tom and Hank have different skills that each can feed off of. Each man can use his skill to trade the benefit of their skills with one another. Saying that Tom can catch fish and Hank can climb trees, it would make sense for Tom to catch fish, Hank to gather coconuts and for them to trade their goods with one another = specialization.

Continued There are gains in economics from trading with a party that has a skill/good not as useful. Say that Hank is not as adaptable to the primitive life, Tom who’s better at catching fish and surviving, none the less they both can benefit from the skills each other have and are better off with each other than without.

Tom Related to Productivity Tom’s consumption without trade. Quantity of coconuts Quantity of fish Toms’ PPC

Hank Related to Productivity Hank’s consumption without trade Quantity of fish Quantity of coconuts Hank’s PPC

Opportunity Cost

How They Gain