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International trade - Coggle Diagram
International trade
Interdependence and the Gains from Trade
Economics is about trade and trade crosses boundaries.
Due to globalization, we can specialize and trade with others, leading to economic interdependence.
Individuals and nations rely on specialized production and exchange as a way to address problems caused by scarcity.
Trade can benefit everyone in a society because it allows people to specialize in activities in which they have a comparative advantage.
Comparative vs. Absolute advantage
Absolute advantage
the ability to produce more or better goods and services than somebody else.
The comparison among producers of a good according to their productivity—absolute advantage
Comparative advantage
the ability to produce goods and services at a lower opportunity cost, not necessarily at a greater volume.
Compares producers of a good according to their opportunity cost.
The producer who has the smaller opportunity cost of producing a good is said to have a comparative advantage in producing that good.
Comparative advantage and differences in opportunity costs are the basis for specialized production and trade.
Imports—goods produced abroad and sold domestically
Exports—goods produced domestically and sold abroad
Production Possibilities without trade
If the farmer and rancher choose to be self-sufficient, trade will not happen.
International trade and Specialisation