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INTERDEPENDENCE AND THE GAINS FROM TRADE - Coggle Diagram
INTERDEPENDENCE AND THE GAINS FROM TRADE
Interdependence
Rely on most of whom you've never met
Provide goods and services you enjoy
How trade make everyone better off
Step 1: Without trade
Building the PPF for each country
The consumption equals the product ability
Step 2: With trade
After exchanging goods, comparing consumption without trade and consumption with trade
Gain from trade
Arise from comparative advantage (differences in opportunity cost)
When each country specializes in the good(s) in which it has comparative advantage
Total production in all countries is higher
The word's "economic pie" is bigger
All countries can gain from trade
The price of the trade
Must lie between opportunity cost
Trade can make everyone better off
One of the Ten Principles from chapter 1
We now learn why people-and nations-choose to be interdependence
Relative cost = opportunity cost
A nation with a comparative advantage in a commodity also have lower opportunity cost in the production of that commodity
Conclusion
The principle of comparative advantage applies to country as well as to people
A nation sholud specialize in producing the commodity that it has comparative advantage ( with the lower opportunity cost)
Summary
Comparartive advantage
Trade make everyone better off
Absolute advantage
The priciple of comparative advantage applies to country as well as to people
Interdependence and trade are desirable
Economists use the principle of comparative advantage to advocate free trade among countries