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Economics : specialization and trade - Coggle Diagram
Economics : specialization and trade
Adam Smith : "first modern economist"
Wrote An Inquiry into the Nature and Causes of the Wealth of Nations
Said specialization was what made countries wealthy
Said trade was what made them better off
Specialization or the division of labour
Specialization = sign of modern civilization
Modern era -> extreme specialization
Analogy: Pizza restaurant where each worker has a different job -> similar to a supply chain
Each worker more productive -> pizza made more efficiently
Trade
Analogy: John makes better Pizza and Hank makes better t-shirts so they trade and both benefit
Production Possibilities Frontier (PPF)
Show different combinations of two goods being produced using all resources efficiently
Inside the curve is inefficient (X)
Outside the curve is impossible (Y)
On the cure is efficient (A,B,C)
Absolute advantage : can produce more goods than other countries
Opportunity cost : is a cost of production of good, measured in losses in production of another good.
Comparative advantage: when a country can produce goods with cheaper opportunity cost than another
Specializing in producing things in which they have a comparative advantage and then trading with other countries that have a comparative advantage in something else is a mutually beneficial trade
"Self-sufficiency is inefficiency"
