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Gains From Trade

Gains From Trade. Specialization, 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

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Gains From Trade

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  1. Gains From Trade Specialization, Comparative, and Absolute Advantage

  2. 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)

  3. 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

  4. 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

  5. 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

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