Module 4: Comparative Advantage & Trade

Trade

Providing goods and services to others in exchange for goods and services.

Gains from Trade

people can get more of what they want through trade than they could if they tried to be self-sufficient.

Specialization

Increase in output is due to _____: each person specializes in the task that he or she is good at performing.

Comparative Advantage

An individual has a _____ in producing a good or service if the opportunity cost of producing the good or service is lower for that individual than for other people.

Absolute advantage

An individual has an _____ in producing a good or service if he or she can make more of it with a given amount of time and resources. Having an absolute advantage is not the same thing as having a comparative advantage.

Terms of trade

Rate at which one good can be exchanged for another.

AP Exam tip #1

The producer with the absolute advantage can produce the largest quantity of the good. However, it is the producer with the comparative advantage, and not necessarily the one with the absolute advantage, who should specialize in the produc- tion of that good to achieve mutual gains from trade.