Unit 3: Interdependence and the Gains from Trade
Why a country that is worse at making everything still gains from trading, once opportunity cost enters the picture.
4 topics · 13 questions
Each topic is a path, not a menu: work down it in order and every question builds on the one above. Click any of them to watch the answer draw itself.
Absolute Advantage vs Comparative Advantage
- How it worksHow does comparing opportunity costs, not raw output, decide who has the comparative advantage?
- Worked exampleFind who has the comparative advantage in wheat if Farmer A can grow 8 bushels or 4 bolts of cloth a day and Farmer B can grow 6 bushels or 6 bolts.
- Common mistakeWhy can a country have the comparative advantage in a good even without the absolute advantage in making it?
- Going furtherWhat happens to the pattern of trade if Farmer B's opportunity cost of cloth changes so both farmers now share the same comparative advantage?
Your turn1 of 2
Farmer A can grow 9 bushels of wheat or 5 bolts of cloth a day. What is Farmer A's opportunity cost of one bushel of wheat, in bolts of cloth?How the PPF Moves Once Trade Opens Up
- How it worksHow does specializing where you have the comparative advantage push total world output above what isolation could produce?
- Worked exampleWalk me through two countries each specializing in their comparative-advantage good and then trading at a price between their two opportunity costs.
- Going furtherWhat happens to the gains from trade if the two countries' opportunity costs happen to be identical?
Your turn1 of 2
Two countries, each specializing where they hold the comparative advantage, trade at a price of 3 bolts of cloth per bushel of wheat. If Country A exports 23 bushels of wheat, how many bolts of cloth does it receive in return?Setting a Price Both Trading Partners Will Accept
- How it worksHow does the range between two countries' opportunity costs set the terms of trade both sides will accept?
- Worked exampleFind a trading price for cloth in bushels of wheat that both farmers in a comparative-advantage example would accept.
- Common mistakeWhy isn't trade a zero-sum deal where one side's gain is the other side's loss?
Your turn1 of 2
Find a trading price for cloth in bushels of wheat that both farmers would accept, when Farmer A's opportunity cost of cloth is 2 bushels and Farmer B's is 4 bushels.Why a Poorer Trading Partner Doesn't Make a Country Worse Off
- How it worksHow does comparative advantage, not wage levels, decide what each country should specialize in?
- Common mistakeWhy doesn't a country need to be richer or more advanced than its trading partner to gain from trading with it?
- Going furtherWhat happens inside a country to the workers in the industry that trade shrinks, even while the country overall gains?
Your turn1 of 2
A wealthy country trades with a much poorer country that pays its workers far lower wages. A critic argues the wealthy country must be getting exploited in this deal, since it's trading with cheaper labor. Does a lower-wage trading partner make a country worse off from trading with it?