1. Absolute v. Comparative Advantage
Everyone gains from trade!
- it allows people to specialize in the production of goods for which
they have a comparative advantage
- these people then trade for goods that other people produce
Specialization causes…
- total output rise
- everyone shares the benefits (true for countries and individuals)
- restrictions on trade reduce economic well-being
People produce because they want to trade and get something in
return. Trade makes us interdependent!

2. Absolute advantage: the producer that has the highest productivity,
most efficiency, and requires the fewest resources has an absolute
advantage.
* compares the quantity of inputs required to make a product
Comparative advantage: the producer with the lowest opportunity cost
of production has a comparative advantage.
* if producers have different opportunity costs of production for each
good, each should specialize in the production of the good with the
lowest opportunity costs
* they can then trade some of their output for the other good
* trade makes both producers better off because it allows for
specialization, and specialization increases the total production
available to be shared

3. Both producers gain when they trade at a price that is between their
domestic opportunity costs…
- the decision to specialize and the resulting gains from trade are
based on comparative advantage, not absolute advantage.
- a single producer can not have a comparative advantage in the
production of both goods because a low opportunity cost of
producing one good implies a high opportunity cost of producing
the other good