One of the Ten Principles from Chapter 1 Trade can make everyone better off.
Exports
Goods produced domestically and sold abroad.
To sell domestically produced goods abroad.
Imports
Goods produced abroad and sold domestically.
To purchase goods produced in other countries.
Trade Makes Both Countries Better Off
Countries can acquire gains from trade with other countries. Two countries can gain from trade when each specializes in the good it produces at lowest cost.
Absolute Advantage
The ability to produce a good using fewer inputs than another producer.
Comparativeadvantage
the ability to produce a good at a lower opportunity cost than another producer.
Absolute advantage is notnecessary for comparative advantage!
Gains from trade arise from comparative advantage (differences in opportunity costs)
When each country specializes in the good(s) in which it has a comparative advantage, total production in all countries is higher, the world’s “economic pie” is bigger, and all countries can gain from trade.
