Introduction - Interdependence and the gains from trade - Comparative advantage: the driving force of specialization

6 important questions on Introduction - Interdependence and the gains from trade - Comparative advantage: the driving force of specialization

What does it mean to have an absolute advantage, when trading?

When a producer requires fewer/smaller inputs than another producer, in order to produce a good.
(For example, less time required to produce one unit).

What is opportunity cost, when talking about comparative advantage? (Frank and Ruby each spend 8 hours a day producing 2 products)

The cost to produce one product in terms of the other product. The trade-off between the two goods.

What are the economic benefits of specialization and a comparative advantage?

The total production in the economy rises, so the economy grows.
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What are the economic benefits of trade?

Trade allows people to specialize towards a comparative advantage, which is beneficial for everyone.

What determines the price at which trade takes place?

The price must lay between the two opportunity costs.

In which situation are there no gains from trade?

When the opportunity costs are the same for both parties, there is no comparative advantage, so no gains from trade.

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