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The Gains from Trade

15 January, 2016 - 09:48
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LEARNING OBJECTIVES

  1. Differentiate between an absolute advantage in producing some good and a comparative advantage.
  2. Explain and illustrate the conditions under which two countries can mutually benefit from trading with each other.
  3. Explain and illustrate how the terms of trade determine the extent to which each country specializes.
  4. Explain and illustrate the mutual benefits of trade.

To model the effects of trade, we begin by looking at a hypothetical country that does not engage in trade and then see how its production and consumption change when it does engage in trade.

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