ECON 2001.01 Lecture Notes - Lecture 11: Autarky, Comparative Advantage, Opportunity Cost
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3 Oct 2018
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We have learned that any voluntary exchange must be beneficial to both sides. Exchanges between two individuals must leave both individuals better off. Exchanges between two countries must leave both countries better off. An important difference is that while the country as a whole is better off, not everyone in the country is better off; there are winners and losers. The gains from trade for a country come from three sources. Producers can sell more of their product in the world market at a higher price. Consumers can purchase more goods in the world market at a lower price. Consumers also gain from having a greater variety of goods available. Specialization and trade are driven by comparative advantage. Comparative advantage is the ability to produce a good at a lower opportunity cost than another producer. Opportunity cost is the value of the alternative activity that you gave up when you chose to do an activity.
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