Chapter 3 Trade by sverma

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Slide Notes

Chapter 3 Trade

Published on Nov 19, 2015

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PRESENTATION OUTLINE

Chapter 3: Interdependence and Gains from Trade

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In a global economy we can...

Be economically self-sufficient
OR
Can specialize and trade with others

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Most countries choose Interdependence

Individuals and nations rely on specialized production and exchange as a way to address problems caused by scarcity

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What determines the pattern of production and trade?

Answer: Differences in Opportunity Costs

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Absolute Advantage

Producer that requires a smaller quantity of inputs to produce a good (or higher productivity) has an absolute advantage in producing that good.

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Comparative Advantage
-Producer who has the smaller opportunity cost of producing a good has a comparative advantage in producing that good

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Comparative advantage and differences in opportunity costs (not absolute advantage)are the basis for specialized production and trade

Determination of exchange rate:
As long as the exchange rate is between the two opportunity costs, both parties will gain from trade

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