1. Why Nations Trade
Trade allows nations to specialize in some products and then trade them for goods and services that are more expensive to produce.
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2. Why Nations Trade (cont.)
Reasons to trade
Some countries lack essential raw materials.
Specialization
Exports
Imports
American Dependence on Trade
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3. The Basis for Trade
Trade works best when countries focus on those products they can produce best.
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4. The Basis for Trade (cont.)
Countries find it cheaper to import some products than to manufacturer them.
Absolute advantage—country can produce more of a product than another country.
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5. The Basis for Trade (cont.)
Countries with an absolute advantage benefit from trade with another country whenever it has a comparative advantage because its opportunity cost is lower than another country’s.
Total world output grows when there is specialization and trade among nations.
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6. The Basis for Trade (cont.)
Production possibilities frontier—diagram illustrating the maximum combinations of goods and/or services one can produce utilizing fully employed resources.
The Gains from Trade
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7. Figure 3