) y Geoff Riley FRSA has been teaching Economics for over thirty years. y Those values are called intercepts. column of our m Q , Although both Harry and Steven work the same job, they still benefit from trading. Q + Keep in mind, however, that James could have declined. Creative Commons Attribution-ShareAlike License. = , Q We can divide each by two and split them between the countries, this means that the US now gets 48 apples, and 11 papayas, and Mexico gets 15 apples, and 13 papayas. For example, for the ordered pair 2 {\displaystyle b} {\displaystyle Q_{2}=x} 1 would not be optimal for Harry because Harry could just make that many himself. ( 2 1 Q The greater are the differences, the greater the gains (Ethier, 2008). If the benefits weigh more, the person will cooperate with the trade; if the costs weigh more, the person will not cooperate. Let {\displaystyle (x,y)} 2 , x This is what we did in this section. 4 {\displaystyle y} • More complicated answer: In a market system, prices will tend to adjust to ensure that both parties gain from specialization and trade. Before we start calculating, let's first review what the slope {\displaystyle m} Quincy Adams would like to advertise a new phone. ) 2 There is no opportunity for gains from trade because neither person has a comparative advantage in producing either good. {\displaystyle y} {\displaystyle (0,4)} ) As such, all that is needed is to divide r 1 2 The different values of 2 1 Since the glasses are in the numerator, and the boxes are in the denominator, we will just have to switch the places of the numbers. = 1 Q and 1 3 {\displaystyle Q_{2}} , and Steven, r There is a multitude of ways to find the slope in this instance, yet only one such calculation will be shown. = made. 1 The pair started working together. He writes extensively and is a contributor and presenter on CPD conferences in the UK and overseas. , -intercept, defined as -intercept is defined as the ordered pair {\displaystyle y} {\displaystyle m} ) x For example the Canadian economy which is rich in low cost land is able to exploit this by specializing in agricultural production. = ( Comparative advantage, specialization, and gains from trade. 1 , is a comparison of the slope {\displaystyle (x_{2},y_{2})=(6,0)} In Seaside, however, a truck could be exchanged for five boats. "While it may be true that working with other individuals is beneficial when you do not know how to do a task, it does not necessarily mean that working with other individuals is always best if the task you do is either similar or identical. 2 {\displaystyle Q_{2}} ) You can only find the slope once you know two different ordered pairs, For example, = for every This is true because the PPF is linear, meaning the same "rate of change" is used for all points Let's put this into more concrete terms with an example. , while the slope of 1 Q Multi-stage production is widely recognized as an important feature of the modern global economy. y Finally, before ending with a few comprehension questions, let's realize one more fact: when markets extend in the skill or production of goods, the number of times specialization occurs will increase, and thus the gains from trade. We will introduce the concept of Comparative Advantage and discuss how gains from specialization allow us to use our resources efficiently. . Gains from Specialization and Learning Consider the category of machinery, where the U.S. economy has considerable intra-industry trade. Q x Trade and Specialization. , you can find any ordered pair the ability of two agents to increase their consumption possibilities by specializing in the good in which they have comparative advantage and trading for a good in which they do not have comparative advantage. the exchange of goods, services, or resources between one country and another. According to Smith, the gains from trade arise form the advantages of division of labour and specialisation—both at the national and international level. However, the lessons learned within will extend to both Microeconomics and Macroeconomics. {\displaystyle m_{r,s}} {\displaystyle x} x The answer would have been nearly identical to Example 2, but would mean something different because of how a function is defined. The answer to that question is "no, not always, but most of the time." A person will weigh the costs to the benefits. Q for every = Before we get to the calculation, we need to know the definition of unitary opportunity cost. So both countries are better off and get more of both goods when they specialize and trade! s Imagine that James Portley and Quincy Adams met one day. Check your Understanding . Let's now compare the opportunity cost of each individual. 1 y 1 If Harry wants to find the optimal unit of boxes for both him and Steven, he needs to find the number of units that will not go over either Steven's or Harry's opportunity cost of production. However, since he cannot convincingly give any reason as to why you, the seller, should buy this product, he will fail to change the face of the phone industry – his desire was not met. The rate of change is simply a division of two points, {\displaystyle m_{r,h}} , {\displaystyle m_{r,h}={Q_{2} \over Q_{1}}} Input approach to … One agent has absolute advantage in both goods. Machinery comes Learn more ›, This study note looks at comparative advantage and the gains from specialisation and trade. ) {\displaystyle -1.5=x} Boston House, {\displaystyle y=mx+b} x 1 It is the value of y that will intersect with the vertical If Country X is open to international trade and the world … means for us. x Harry can lose fewer glasses from gaining boxes than Steven can: Steven can lose fewer boxes from gaining glasses than Harry can: This page was last edited on 29 September 2019, at 22:10. {\displaystyle x} for this graph, if Q Comparative advantage. . If the two countries trade at a rate of exchange of 2 digital cameras for one vacuum cleaner, the post-trade position will be as follows: Compared with the pre-specialisation output levels, consumers in both countries now have an increased supply of both goods to choose from. Since they know they will gain from trading, they decide to trade a number of boxes made for glasses and vice-versa. + Since there are no new phones in the market, Adams will have to find a new phone somewhere else; otherwise, he may not find a new phone to advertise. = ( represents the loss of The agents have the same opportunity costs. Q y Write your answer as a positive integer (e.g. {\displaystyle y=mx+b} Because x , Because we already know the slope of the line Remote learning solution for Lockdown 2021: Ready-to-use tutor2u Online Courses x Q to find all possible The two different values of while Steven's slope and {\displaystyle x} h {\displaystyle x} (glasses) for every ) x One of the main determinants ofinternational trade Most misunderstood aspect of international trade? Chapter 2 Part 3:Comparative Cost Advantage Theory: Gains from Specialization and Trade Final point to understand before we move on, the slope of the answer above can be found using any point along the PPF of Steven's production line. {\displaystyle x_{1}}

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