Econ Chapter 3 Notes - Summary Principles of Economics PDF

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Chapter 3—Interdependence and the Gains from Trade Intro   

People provide you with the goods and services you enjoy because they get something in return What do people gain when they trade with one another Trade allows for greater variety

A Parable for the Modern Economy  

Production Possibilities o Shows the trade-offs that the people face Specialization and Trade

Comparative Advantage: The Driving Force of Specialization  

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Absolute Advantage—the ability to produce a good using fewer inputs than another producer o The person who requires less input to produce a good Opportunity Cost and Comparative Advantage o Opportunity cost—whatever must be given up to obtain some item o The producer who gives up less X has smaller opportunity cost of producing X Comparative Advantage and Trade o The gains from specialization and trade are based on comparative advantage  With specializing in good with comparative advantage, total productions rises o Trade can benefit everyone in society because it allows people to specialize in activities in which they have a comparative advantage The Price of Trade o For both parties to gain from trade, the price at which they trade must lie between the two opportunity costs

Applications of Comparative Advantage 

Should Tom Brady Mow His Own Lawn? o In 2 hours, Brady can mow his lawn or make 20,000 in commercial o In 4 hours Forrest can mow lawn or make 40 at McDonalds o As long as Forrest makes more than 40 and less than 20,000 then it works

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Should the United States Trade with Other Countries? o Imports—goods produced abroad and sold domestically o Exports—goods produced domestically and sold abroad...