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Module 4

This module explains the concepts of comparative and absolute advantage in trade, highlighting how specialization leads to increased output and gains from trade. It emphasizes that individuals and economies can benefit from trading goods and services rather than being self-sufficient. Additionally, it addresses the importance of mutually beneficial terms of trade and the misconceptions surrounding international trade.

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2 views11 pages

Module 4

This module explains the concepts of comparative and absolute advantage in trade, highlighting how specialization leads to increased output and gains from trade. It emphasizes that individuals and economies can benefit from trading goods and services rather than being self-sufficient. Additionally, it addresses the importance of mutually beneficial terms of trade and the misconceptions surrounding international trade.

Uploaded by

kerry.jia.wang
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PPTX, PDF, TXT or read online on Scribd
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Module 3

Comparative
Advantage and
Trade
In this Module, you will learn to:

• Explain how trade leads to gains for an individual or an economy

• Explain the difference between absolute advantage and comparative advantage

• Describe how comparative advantage leads to gains from trade in the global
marketplace
Gains from Trade
• In a market economy, individuals engage in trade （贸易） : they provide goods and
services to others and receive goods and services in return.
• There are gains from trade （贸易利得） : people can get more of what they want
through trade than they could if they tried to be self-sufficient. This increase in
output is due to specialization （专业化） : each person specializes in the task that he
or she is good at performing.
• The economy, as a whole, can produce more when each person specializes in a
task and trades with others.
• The benefits of specialization are the reason a person typically focuses on the
production of only one type of good or service.
Comparative Advantage and Gains from Trade
• The economy, as a whole, can produce more when each person specializes in a
task and trades with others.
• The benefits of specialization are the reason a person typically focuses on the
production of only one type of good or service.
• An individual has a comparative advantage （比较优势） 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.
• An individual has an absolute advantage （绝对优势） 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.
Comparative Advantage and Gains from Trade
Comparative Advantage and Gains from Trade
Comparative Advantage and Gains from Trade
Mutually Beneficial Terms of Trade
• The terms of trade （贸易条件） indicate the rate at which one good can be
exchanged for another.
• As long as people have different opportunity costs, everyone has a
comparative advantage in something, and everyone has a comparative
disadvantage in something, so everyone can benefit from trade.
• 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
production of that good to achieve mutual gains from trade.
Comparative Advantage and International Trade
• Politicians and the public often question the desirability of international trade,
arguing that the nation should produce goods for itself rather than buy them from
foreigners.
• Industries around the world demand protection from foreign competition: Japanese
farmers want to keep out American rice, and American steelworkers want to keep
out European steel.
• Moreover, these mutual gains don’t depend on each country’s being better at
producing one kind of good. Even if one country has, say, higher output per
person-hour in both industries—that is, even if one country has an absolute
advantage in both industries—there are still mutual gains from trade.
Comparative Advantage and International Trade
Review:Check Your Understanding
1. In Italy, an automobile can be produced by 8 workers in one day and a washing
machine by 3 workers in one day. In the United States, an automobile can be
produced by 6 workers in one day, and a washing machine by 2 workers in one day.
a. Which country has an absolute advantage in the production of automobiles? In
washing machines?
b. Which country has a comparative advantage in the production of washing
machines? In automobiles?
c. What type of specialization results in the greatest gains from trade between the
two countries?

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