GAINS FROM TRADESpecialization, Comparative, and Absolute Advantage

What is Specialization?

Self Sufficiency is great, but not economically productive

People specialize Individual workers become highly skilled at

a specific task Adam Smith mentioned this in Wealth of

Nations Basically division of labor (think group

projects)

Specialization leads to Trade No longer producing everything, so we

must trade Trading frees up time and resources to

do things we are better at. Trade is voluntary---we give up

something in order to get something else we want Used to be bartering---coincidence of wants Market economies use money to trade Money only useful is it is generally

accepted Trade barriers hinder interdependence

How do we gain from trade?

Absolute Advantage Condition of producing a good with fewer

resources than someone else; or producing more of a good with same resources

Comparative Advantage Ability to perform a task at a lower

opportunity cost than someone else trying to perform the same task.

How to calculate? See video

So how does trade really help us? Moves goods to people who value them Increases quantity and variety of

available goods Lowers the cost of goods It does, however, make more winners

and losers It helps the whole system, but may hurt

individual areas