Quiz2Notes - Interdependence and gains from trade A PARABLE...

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Interdependence and gains from trade 01/10/2007 19:35:00 A PARABLE FOR THE MODERN ECONOMY people face tradeoffs- they cannot efficiently produce all goods. They either  product one or other most effectively. When ppl specialize in creating the goods they  are good at and trading, everyone is better off because the production possibilities  frontier shifts to the right. Total production possibility increases.  COMPARATIVE ADVANTAGE: THE DRIVING FORCE OF SPECIALIZATION Absolute advantage:  the ability to produce a good using fewer inputs than another  producer Comparative advantage:  the ability to produce a good at a lower opportunity cost than  another producer the gains from specialization and trade are based on comparative advantage.  Whoever has the comparative advantage of producing a good should produce  that good.  Each party benefits by obtaining a good at a price lower than his or her opp  cost of that good.  The price at which the trade is made must lie between the parties opp costs.  APPLICATIONS OF COMPARATIVE ADVANTAGE SHOULD TIGER WOODS MOW HIS OWN LAWN?-if tiger could be making  10,000 working in the time it takes to mow his lawn, and Johnny could be  making $25  working at mcDonald’s, both parties will benefit if tiger pays  Johnny less than his opp cost of $10,000 and more than Johnny’s opp cost of  25$.  Imports:  goods produced abroad and sold domestically
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Exports:  goods produced domestically and sold abroad  SHOULD THE US TRADE WITH JAPAN? –bc japan has a comparative  advantage in producing cars, it should produce cars and export them to the  us while the us should grow food and export it to japan.   
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