ECON 1200 1st Edition Lecture 5• It is possible to have the absolute advantage without having the comparative advantage of a particular good (and vise versa)o Cannot have the comparative advantage in both goods• The gains from trade arise from specialization and trade based on comparative advantage• If 2 individuals, firms, or countries have different marginal opportunity costs of producing 2 goods, then each will have the comparative advantage in the production of one of the goodso The only time 2 trading parties cannot gain from trade is when they have identical marginal opportunity costs• How much do countries trade??o EX) Country A produces 200 carts per week and Country B will produce 1200 swords.  Country A produces its carts at an opportunity cost of 2 swords, so country B will not accept fewer than 2 swords in exchange  Country B could produce a cart itself at an opportunity cost of 5 swords, so it will not paymore than 5 swords in exchange for each cart Therefore the terms of trade must satisfy the following condition: 2 swords < 1 cart< 5 swords• Gains from Trade= Consumption with trade- Consumption without trade• GAINS FROM TRADE CHART:o Assume Hodor and Groot trade 130 carts and 390 swords per week…Country Hodor GrootQuantity Carts Quantity Swords Quantity Carts Quantity SwordsProduction/Consumption without Trade 50 300 120 600Production with Trade200 0 0 1200Trade -130 +390 +130 -390Consumption with Trade 70 390 130 810Gains From Trade 20 90 10 210Calculate Gains from Trade: Hodor (Carts): 70-50= 20Hodor (Swords): 390-300= 90Groot (Carts): 130-120= 10Groot (Swords): 810-600= 210*With trade, Hodor gains 20 carts and 90 swords per week and Groot gains 10 carts and 210 swordsThese notes represent a detailed interpretation of the professor’s lecture. GradeBuddy is best used as a supplement to your own notes, not as a substitute.• Imports- Bought domestically but produced in another country• Exports- Goods and services produced domestically but sold in other countries• Countries gain from trade by specializing and exporting products in which they have the comparative advantage and importing the goods when they do