Absolute v Comparative Advantage Everyone gains from trade

Absolute v. Comparative Advantage Everyone gains from trade! - it allows people to specialize in the production of goods for which they have a comparative advantage - these people then trade for goods that other people produce Specialization causes… - total output rise - everyone shares the benefits (true for countries and individuals) - restrictions on trade reduce economic well-being People produce because they want to trade and get something in return. Trade makes us interdependent!

Absolute advantage: the producer that has the highest productivity, most efficiency, and requires the fewest resources has an absolute advantage. * compares the quantity of inputs required to make a product Comparative advantage: the producer with the lowest opportunity cost of production has a comparative advantage. * if producers have different opportunity costs of production for each good, each should specialize in the production of the good with the lowest opportunity costs * they can then trade some of their output for the other good * trade makes both producers better off because it allows for specialization, and specialization increases the total production available to be shared

Both producers gain when they trade at a price that is between their domestic opportunity costs… - the decision to specialize and the resulting gains from trade are based on comparative advantage, not absolute advantage. - a single producer can not have a comparative advantage in the production of both goods because a low opportunity cost of producing one good implies a high opportunity cost of producing the other good