Chapter 4
Gaining From Trade
• Is it better to be good at doing a lot of
different things or to be great at one thing?
• Should people specialize their talents or not?
• What examples can you use to support your
argument?
Question
Specialization Improves
Productivity
• Specialization – doing one task/job very well
• Distribution of Labor – breaking up production into specialized
departments for increased productivity
• Increases how fast things are created
• Increases the quality of things created
• Increases the standard of living by having better products faster
• Levels of specialization depend on population
• Highly populated areas can be highly specialized due to lots of
people doing similar jobs
• Rural areas forced to be less specialized
Specialization Encourages Trade
• People specialize, so they need more goods,
which encourages trade
• Creates voluntary exchange - people enter into
exchanges because they know they will both
benefit from it
• Old systems would barter - trade good for good
but it required a coincidence of wants –
• Having something someone else wants
• Can be troublesome due to finding people that want
your stuff
• Currency now created as a way to make
exchanges easier
Trade Creates Economic
Interdependence
• Economic Interdependence
• Depending on other people or countries to have the
goods you do not create yourself
• Requires a steady supply
• Trade Barriers
• Things that hinder the trade between people or countries
and force self-sufficiency
• Tariffs, high taxes on foreign goods, that force
people to buy American or close to home
Gaining from Trade
• Two types of advantages in trading
• Absolute advantage – ability to be more
efficient in every type of production of a good
• You make it better and faster than anyone
• Comparable advantage – ability to perform a
task at a lower opportunity cost than others
• You benefit by giving up less than the other
would to make a product
• Not always better to be the best at everything
Gaining Wealth from Trade
• Trade raises our standard of living
• Gain wealth in 3 ways:
1. Gets goods to those who value them
2. Increases the number and variety of goods
• Incredible numbers of similar products for people to choose
3. Lowers the cost of goods
• Opens people to cheaper products from different markets
• Also opens to larger markets – allowing mass production
Negative Side of Trade
• Trade can negatively affect people as well
• Areas with better comparable advantage can
put others out of business
• Causes people to lose jobs, which is why
they oppose the free trade or free market
system
• Not truly a negative
• Forces people to gain new skills and abilities
• In turn makes them more marketable