Chapter 3 Interdependence and Gains from Trade Production Possibilities If the farmer and rancher choose to be self sufficient rather than trade with each other then each consumes exactly what he or she produces In this case the production possibilities frontier is also the consumption possibilities frontier Without trade Figure 1 shows the possible combinations of meat and potatoes that the farmer and rancher can each produce and then consume Comparative Advantage Driving Force of Specialization absolute advantage ability to produce a good using fewer inputs than another producer opportunity cost whatever must be given up to obtain some item comparative advantage ability to produce a good at a lower opportunity cost than another producer When each person specializes in producing the good for which he or she has a comparative advantage total production in the economy rises Ex Because the farmer and rancher have different opportunity costs each benefits from trade by obtaining a good at a price that is lower than his or her opportunity cost of that good Conclusion Trade can benefit everyone in society because it allows people to specialize in activities in which they have a comparative advantage General rule For both parties to gain from trade the price at which they trade must lie between the two opportunity costs imports goods services produced aborad sold domestically exports goods services produced domestically sold abroad
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