Comparative Advantage and Trade

Absolute advantage vs Comparative Advantage key points

1. Can have AA without CA 2. Can have CA without AA

Direct trade example

Child trades baseball card for another

Opportunity cost of picking apples and oranges table

More costly for neighbor to pick apples than it is for me, that's why i have to get apples although she is better at it.

Indirect trade example

Selling our labor services as a cashier

Economic principle: Comparative advantage and the gains from trade

The basis for trade is compartive advantage, not absolute advantage.

Complete specialization

a situation in which a country produces only one good

If your neighbor offers to trade apples (which you already produce) for your (cherries). When is this trade accetable?

You trade when you will end up with more of both goods than you normally consume before trade. It should be a point which is beyond your PPF

Comparative advantage

the ability to produce a good at a lower opportunity cost than another producer

Absolute advantage

the ability to produce a good using fewer inputs than another producer Simply better at producing both outputs, but not the best for consumption as comparative advantage yields better gains with trade. Ex. Megan has absolute advantage as she can pick more of each fruit in the same amount of time

Trade and states its benefit

the act of buying and selling Enables people to increase their production and consumption through specialization