Dr. Amuedo-Dorantes 1Chapter 3: Interdependence and the Gains from Trade This chapter teaches you about the benefits of trade, specifically by illustrating comparative advantage, using the Production Possibility model developed in Chapter 2. A) There are two ways in which people can satisfy their wants: • Being economically self-sufficient, i.e. living in autarky. • Specializing in producing what they do best and trading, i.e. being interdependent. B) However, how do we find it whether we should specializing at producing a particular good? Two principles have been proposed in economics: • Principle of Absolute Advantage: According to this principle, whoever requires fewer inputsin order to produce a particular good OR can produce more unitsof that good in a given period of time will have an absolute advantage in producing that item. The problemwith the principle of absolute advantage, initially proposed by Adam Smith in The Wealth of Nations (1776) is that more than a single person may have the absolute advantage in producing every single good, i.e. if they are very productive.
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