Chapter 3: Gains from Trade and Comparative Advantage Flashcards
What is trade?
Trade is the exchange of goods and services between individuals, businesses, or countries, allowing participants to benefit from each other’s comparative advantages. It promotes specialization, increases variety, and enhances overall welfare through mutual benefit.
Why do individuals engage in trade?
To mutually benefit, not out of charity.
What are the two types of advantages discussed in this chapter?
Absolute advantage and comparative advantage.
What is absolute advantage?
The ability to produce more of a good using the same resources than another individual or country.
What is comparative advantage?
The ability to produce a good at a lower opportunity cost than another individual or country.
How can trade be beneficial even if one individual is better at producing both goods?
Specialization based on comparative advantage allows for increased total consumption through trade.
What happens in production without trade?
Each person’s production possibilities reflect their trade-offs between two goods, limiting their consumption.
How does opportunity cost relate to comparative advantage?
Comparative advantage is determined by who has the lower opportunity cost for producing a good.
What must the trade price be for it to be beneficial for both parties?
The price must lie between their opportunity costs.
Can countries also benefit from comparative advantage?
Yes, countries can specialize in goods where they have a comparative advantage.
Provide an example of comparative advantage between countries.
Canada has a comparative advantage in lumber, while Scotland excels in bike production.
