ECON-2110 Lecture Notes - Lecture 2: The Takeaway, Comparative Advantage, Fruit Salad
27 Sep 2016
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Chapter 2: the power of trade and comparative advantage. Make people better off when preferences differ. Trade increases productivity through specialization and the division of knowledgelets you specialize in things you are good at. In a modern economy, more knowledge is used than could exist in a single brain. Division of knowledge increases as markets grow. Modern growth is mainly due to knowledge. Trade is sufficient to support large numbers of scientists, engineers, etc. Increase in world trade can lead to an increase in the division of knowledge. The ability of a country to produce a good at lower opportunity cost than another country. Absolute advantage: the ability of a country to produce a good using fewer inputs than another country. A country need not have an absolute advantage in anything to benefit from trade. To understand why, we need to understand comparative advantage.
