chapter 8: gains from trade

Question 1

what is gains from trade?

Answer 1

the benefits that come from reallocating resources, goods, and services to better uses

voluntary exchange between agents because there is benefits to both parties

Question 2

what is comparative advantage?

Answer 2

the ability to do a task at a lower opportunity cost

tasks should be allocated to the lowest cost producer

relative

everyone has a comparative advantage in something, even if they don’t have an absolute advantage in anything

Question 3

what is absolute advantage?

Answer 3

the ability to do a task using fewer inputs

absolute advantage tells us who is best at a task, but not who should do the task

Question 4

how to calculate opportunity cost of a task?

Answer 4

time one task takes / time required to produce alternative