Gains from Exchange Why do people willingly trade? In Class – Week 2 Gains from Exchange Why do people willingly trade?

Comparative Advantage and Trade Name: _______________________________________ Circle Econ 201 9AM or 10AM Comparative Advantage and Trade Trade The act of buying or selling. Specialization and Gains from Trade FIGURE 2-4 Production Possibilities for You and Your Neighbor, without Trade

Determining the Costs/Benefits of Trade Opportunity Costs Suppose each decides to specialize (produce only) the product that they can produce most of (also will be the one they are most efficient at producing) What is your neighbor’s cost of producing the first lb. of apples (opportunity cost in cherries), given he produces only apples _______________(his/her cost) What is the your cost of producing the first lb. of cherries (opp. cost in apples), given that you only produce cherries ___________(your cost) What would your neighbor be willing to pay for 1 lb of cherries (WTP = _____) What would you be willing to accept for 1 lb of cherries (WTA=________) How do we measure whether or not these two are made better or worse off from being able to trade?

Determining the Costs/Benefits of Trade Absolute/Comparative Advantage Who has an absolute advantage in producing goods? _________(Apples) _____________(Cherries) _____________ (Both) Who has a comparative advantage in producing (i) apples, (ii) cherries ___________(Apples) _____________(Cherries) Is it possible to have both an absolute and comparative advantage in producing all goods?

How does this work? Two people in this market Two goods being produced You and Your Neighbor Two goods being produced Apples and Cherries See if you can do better by specializing That is, what has the least opportunity costs for each of you to produce What will be the market price for exchange?