AP Macroeconomics AMSCO Guided Notes
1.3: Comparative Advantage and Gains from Trade
AP Macroeconomics Guided Notes
AMSCO 1.3 - Comparative Advantage and Gains from Trade
Essential Questions
- How does engaging in trade increase overall production and consumption?
I. Absolute Advantage and Comparative Advantage
1. What is absolute advantage and how did England's industrialization give it an absolute advantage in textile production?
A. Comparative Advantage
1. What is comparative advantage and how does it differ from absolute advantage?
2. How is opportunity cost used to determine which country has comparative advantage in producing a good?
3. Using the Ropistan and Wirania example, explain why Ropistan should specialize in rope and Wirania in wire despite Wirania's absolute advantage in both.
B. Drawbacks
1. What are the main limitations of the comparative advantage model in explaining real-world trade?
2. How can changes in technology or resource availability affect a country's comparative advantage over time?
II. Specialization and Trade
1. What did Adam Smith argue about specialization and division of labor as the basis for economic progress?
A. Mutually Beneficial Trade
1. What are gains from trade and how do they allow countries to consume beyond their production possibilities curve?
2. What are the trade-offs that occur when countries specialize according to comparative advantage?
3. What are terms of trade and how do they determine whether trade between countries is mutually beneficial?
Key Terms
absolute advantage
comparative advantage
specialization
division of labor
mutually beneficial trade
gains from trade