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Gains from Trade

Gains from Trade

GAINS FROM TRADE

HOW DOES TRADE MAKE PEOPLE BETTER OFF?

Objectives:

Analyze how specialization improves productivity, encourage trade, and can lead to economic interdependence.

Experience the extent to which individuals and groups benefit by using their comparative advantage to produce goods and services for trade with others.

Create comic strips to illustrate the concept of comparative advantage.

HOW DOES SPECIALIZATION LEAD TO ECONOMIC ITNTERDEPENDENCE?

Specialization

 is the development of skills or knowledge in one aspect of a job or field of interest. It leads to greater productivity and a higher standard of living.

Societies that specialize are more productive than those that are self-sufficient.

Specialization encourages trade. Trade is a voluntary exchange that is usually facilitated with money.

Trade creates economic interdependence, in which people rely on others for most of the goods and services they want.

HOW DO PEOPLE AND NATIONS GAIN FROM SPECIALIZATION AND TRADE?

An individual holds an absolute advantage when he or she can produce a good or service using fewer resources than someone else.

An individual holds a comparative advantage when he or she can produce a good or service at a lower opportunity cost  than someone else.

 

 

 

 

Specialization

 and trade based on comparative advantage benefits both trading partners-whether individuals, societies, or nations. For example, farmer A and farmer B can both produce both potatoes and pineapples. Even though farmer A holds and absolute advantage in the production of both goods, he and farmer B both benefit when they specialize in producing the good for which they hold a comparative advantage and trade for the other good.

When the principle of comparative advantage guides who produces what, society usually benefits.

Some of the factors that give rise to comparative advantage are climate, natural resources, education, wage levels, and technology differences.

HOW DOES TRADE MAKE US WEALTHIER?

Wealth is defined as our sense of well-being. It is not just how much money we have, but how much we value what we have.

Trade makes us wealthier in three ways

:

Trade moves goods to the people who value them more.

Trade increases the quantity and variety of goods available.

Trade lowers the cost of goods.