The Power of Trade and Comparative Advantage The Power of Trade and Comparative Advantage

46 Pages·2015·2.28 MB·English

MODERN PRINCIPLES OF ECONOMICS
Chapter 2
Third Edition
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Outline
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Trade and Preferences
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Specialization, Productivity, and the Division
of Knowledge
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Comparative Advantage
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Trade and Globalization
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Discussion Question
Think of the last time you bought or sold something.
Why did you make the trade?
Answer: You probably traded because you
preferred what you got over what you gave up. For
example, if you bought a candy bar for $1, you
probably preferred the candy bar to having $1 in
your pocket.
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Introduction
Benefits of Trade
1. Trade makes people better off when preferences
differ.
2. Trade increases productivity through specialization
and the division of knowledge.
3. Trade increases productivity through comparative
advantage.
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Trade and Preferences
Trade Creates Value
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Trade moves goods from people who value them
less to people who value them more.
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Trade makes people with different preferences better
off.
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Trade and Preferences
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Selling a broken laser pointer on EBay (1995)
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Offered at $1 and sold for $14.83 to a collector of
broken laser points
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One man’s junk is another man’s treasure
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eBay profits by making buyers and sellers happy
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Specialization
Trade Allows Specialization
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With no trade, there is no specialization.
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People will specialize in the production of a single
good only when they can trade for other goods.
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Specialization
Increased Productivity
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We can produce more through trade than by
individual production.
• People who specialize have more knowledge
about their field.
• Because they sell large quantities, people who
specialize can take advantage of large-scale
equipment.
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Specialization
Division of Knowledge
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Without specialization, each person produces their
own food, clothing, and so on.
• Each person has the same knowledge as
everybody else.
• The combined knowledge of a society is not
much more than that of a single person.
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Specialization
Division of Knowledge
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With specialization, much more knowledge is used
than could exist in a single brain.
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Knowledge increases productivity so specialization
increases total output.
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Every increase in world trade is an opportunity to
increase the division of knowledge.
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When everyone knows something different, the
combined brain power of society is huge
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