INTERDEPENDENCE AND THE GAINS FROM TRADE.pptx

Gains

1. PRINCIPLES OF MICROECONOMICS INTERDEPENDENCE AND THE GAINS FROM TRADE C H A P T E R 3

2. INTERDEPENDENCE AND THE GAINS FROM TRADE KEY CONCEPTS

3. 1 . PRODUCTION POSSIBILITIES –THE PRODUCTION POSSIBILITIES SHOWS THE MAXIMUM FEASIBLE QUANTITY OF TWO GOODS THAT CAN BE PRODUCED WITH THE AVAILABLE RESOURCES AND TECHNOLOGY KEY CONCEPTS

4. KEY CONCEPTS 2. SPECIALIZATION AND TRADE – SPECIALIZATION IS INVOLVES IN FOCUSING RESOURCES ON THE PRODUCTION OF A LIMITED RANGE OF GOODS OR SERVICES TO GAIN GREATER EFFICIENCY, WHILE TRADE REFERS TO THE RATE AT WHICH ONE GOOD CAN BE EXCHANGE FOR ANOTHER BETWEEN TRADING PARTNERS.

5. KEY CONCEPTS 3. ABSOLUTE ADVANTAGE – IT REFERS TO THE ABILITY OF AN ENTITY TO PRODUCE MORE OF A GOOD OR SERVICE WITH THE SAME AMOUNT OF RESOURCES THAN ANOTHER ENTITY.

6. KEY CONCEPTS 4. OPPORTUNITY COST – IS THE VALUE OF THE NEXT BEST ALTERNATIVE THAT IS FOREGONE WHEN MAKING A CHOICE. IT’S A FUNDAMENTAL CONCEPT IN ECONOMICS BECAUSE IT EMPHASIZES THE TRADE-OFFS INHERENT IN EVERY DECISION.

7. KEY CONCEPTS 5. PRICE OF THE TRADE – FOR BOTH PARTIES TO GAIN FROM TRADE, THE PRICE AT WHICH THEY TRADE MUST LIE BETWEEN THE TWO OPPURTUNITY COSTS.

8. KEY CONCEPTS 6. IMPORTS – GOODS BEING PRODUCED ABROAD AND SOLD DOMESTICALLY

9. KEY CONCEPTS 7. EXPORT – GOODS BEING PRODUCED DOMESTICALLY AND SOLD ABROAD.

10. APPLICATIONS OF COMPARATIVE ADVANTAGE THE PRINCIPLE OF COMPARATIVE ADVANTAGE EXPLAINS INTERDEPENDENCE AND THE GAINS FROM TRADE. BECAUSE INTERDEPENDENCE IS SO PREVALENT IN THE MODERN WORLD, THE PRINCIPLE OF COMPARATIVE ADVANTAGE HAS MANY APPLICATIONS THUS IT STATES THAT EACH GOOD SHOULD BE PRODUCED BY THE COUNTRY THAT HAS SMALLER OPPORTUNITY COST OF PRODUCING THAT GOOD.