Chapter 3

Each person consumes goods and services produced by many other people both in the United States

and around the world. Interdependence and trade are desirable because they allow everyone to enjoy

a greater quantity and variety of goods and services. There are two ways to compare the abilities

of two people to produce a good. The person who can produce the good with the smaller

quantity of inputs is said to have an absolute advantage in producing the good.

The person who has the lower opportunity cost of producing the good is said to have a comparative

advantage. The gains from trade are based on comparative advantage, not absolute advantage.

Trade makes everyone better off because it allows people to specialize in those activities