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Chapter 3

by: Fiona Coupe

Chapter 3 Economics 110

Fiona Coupe
GPA 3.668
Prin of Micro Economics
Harold Elder

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Prin of Micro Economics
Harold Elder
Study Guide
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This 2 page Study Guide was uploaded by Fiona Coupe on Friday January 23, 2015. The Study Guide belongs to Economics 110 at University of Alabama - Tuscaloosa taught by Harold Elder in Winter2015. Since its upload, it has received 204 views.


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Date Created: 01/23/15
Chapter 3 Interdependence and the Gains from Trade 31 A PARABLE FOR THE MODERN ECONOMY Trade allows us to enjoy greater variety 31a Production Possibilities 0 Trade relies on PPF and then consumption 31b Specialization and Trade Specializing in a certain eld and then trading causes increased production for both parties involved 32 COMPARATIVE ADVANTAGE THE DRIVING FORCE OF SPECIALIZATION 0 Have to look for the competitive advantage 32a Absolute Advantage Have to look at inputs and to compare costs 0 Absolute advantage ability to produce a good using fewer inputs than another producer 0 Whoever needs fewer inputs has the absolute advantage 32b Opportunity Cost and Comparative Advantage Can also compare opportunity cost to nd advantage in trade 0 Comparative advantage ability to produce a good at a lower opportunity cost than another producer 32e Comparative Advantage and Trade Gains from specialization and trade are based on comparative advantage 0 When people specialize in producing the good for which they have the comparative advantage the total production rises o Bene t from trade when the cost is lower than the opportunity cost 0 Trade can bene t everyone in society because it allows people to specialize in activities in which they have a comparative advantage 32d The Price of Trade 0 For both parties to gain from trade the price at which they trade must lie between the two opportunity costs 33 APPLICATION OF COMPARATIVE ADVANTAGE Comparative advantage explains interdependence and the gains from trade 33a Should Tom Brady Mow his own lawn As long as cost is between the two parties opportunity costs then its all good 33b Should the US trade with other Countries 0 Imports goods produced abroad and sold domestically Exports goods produced domestically and sold abroad 0 Trade allows all countries to achieve greater prosperity 34 CONCLUSION The principle of comparative advantage shows that trade can make everyone better off


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