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