EC120 Lecture Notes - Lecture 3: Absolute Advantage, Comparative Advantage
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EC120 Full Course Notes
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Chapter 3: interdependence and the gains from trade. One of the ten principles of economics highlighted in chapter 1 is that trade can make everyone better of. This principle explains why people trade with their neighbors and why nations trade with other nations. 2 people a cattle rancher & a potato farmer each both want to eat meat & potatoes. It is easy to see that trade would allow them to enjoy a greater variety. Suppose, the potato farmer is able to raise cattle and produce meat but he is not very good at it. Suppose the cattle rancher is able to grow potatoes but her land is not well suited. The farmer & the rancher can each benefit by specializing in what he/she does best & then trading with the other. The gains from trade are less obvious however when one person is better at producing every good.
