AP Microeconomics AMSCO Guided Notes
1.4: Comparative Advantage and Trade
AP Microeconomics Guided Notes
AMSCO 1.4 - Comparative Advantage and 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. What is the law of comparative advantage and why would both countries benefit from specializing according to it?
3. How do you calculate the opportunity cost of producing a good, and which country has comparative advantage in rope production between Ropistan and Wirania?
4. What is the difference between an input problem and an output problem when assessing comparative advantage?
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, and how does this principle apply to countries?
2. What factors led to regional specialization in the United States one hundred years ago, and how has this changed?
3. What are examples of countries that specialize in particular goods or services in the global economy?
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 in production 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
gains from trade
mutually beneficial trade