Ch 4 Gains from Trade

an approach to production in which individual workers become highly skilled at a specific task increasing production
division of labor
efficiency and productivity that results when workers divide the individual tasks that make up a job and become expert at those task; higher standard of living
voluntary exchange
trade in which both parties give up something in order to get something else they wanted
direct exchange of good/service for another; typically traditional economics
coincidence of wants
when you have something I want and I have something you want
medium of exchange that can be traded for goods and services, used to pay debt; typically market economy
economic interdependence
when people rely on others for most of the goods/services they want, results from specialization and trade
trade barriers
tariffs and other measures to limit interstate trade; designed to protect local industry and promote self-sufficiency
Commerce Clause
Congress shall have power to regulate commerce with foreign nations, and among the several states; empowers national government to promote trade and economic interdependence among states
absolute advantage
when someone can produce a good using fewer resources than someone else
comparative advantage
ability to perform a task at a lower opportunity cost than someone else; David Ricardo
comparative advantage factors
geography, education, wages, technology can play a role in determination of comparative advantage
How does trade make us wealthier?
raises the standard of living in three basic ways;
puts goods in the hands of those who value them
increases quantity and variety of goods
lowers the cost of the goods
money and things money can buy; the total value of all of the things a person owns
trade moves goods to people who value them
trading for things we value increases wealth
trades increases quantity and variety of goods
trade= access to goods around the world; specialization
trade lowers the cost of goods
two ways; 1st by opening markets to less costly goods from other people; 2nd by expanding markets for production
mass production
large-scale manufacturing
Producer has absolute advantage...
if the time and labor required to produce something is less than it is for someone else
Comparative advantage if...
the opportunity cost is less than another producer's opportunity cost
People and nations economically interdependent...
leads to specialization and trade; leads to higher standard of living and wealthier
How does specialization lead to economic interdependence?
Those who specialize must trade; leading to economic interdependence
How do people and nations gain from specialization and trade?
Comparative advantage enables producers to gain from specialization and trade; producing at lowest opportunity costs= nation more efficient and productive
How does trade make us wealthier? (summary)
By moving goods into the hands of people who value them most; increasing quantity and variety of goods; lowering the cost
Specialization -> division of labor -> greater efficiency -> improve productivity -> more products -> increase standard of living

Specialization -> increase trade -> economic interdependence -> money growth