Gains from Trade

Gains from Trade - Gains from Trade Absolute Advantage...

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Gains from Trade Absolute Advantage – (island example Calvin and Hobbes) Comparative Advantage – the ability to produce a good at a lower cost than another producer. Ex. – Calvin’s cost to produce 1 fish – 1f=1b Hobbes cost of producing fish 1f=.5b -Hobbes is the low cost produce of fish - Hobbes has a comparative advantage in producing fish - Hobbes cost of producing bananas 1b=2f -Calvin has a comparative advantage in producing Bananas. Autarky – a system where individuals consume only what they produce. *chart Specialization : a system where individuals consume a basket of goods which is different than what they produce. -Calvin trades 5b for 6f – 5/6 = .833 b/f. Hobbes trades 6f for 5b, so he pays 1.2f/b - Specialization allows each person to consume more by allocating production to the lowest cost producer. - Imports : good produced abroad and sold domestically - Exports : good produced domestically and sold abroad Ex: Middles East, Russia export oil US, Japan import oil
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