Comparative Advantage
People have different opportunity costs of producing. Comparative advantage is the ability of a person to produce a good at a lower opportunity cost than another person can. Adam has a comparative advantage in the gathering of clams because his opportunity cost is 2 pounds of berries foregone while Eve's cost of a pound of clams is 4 pounds of berries.

Specialization

Specialization based on comparative advantage increases output. Before Specialization After Specialization Adam: 8 berries, 4 clams Adam:0 berries, 8 clams Eve: 20 berries, 3 clams Eve: 32 berries, 0 clams Total: 28 berries, 7 clams Total: 32 berries, 8 clams Output increases because people spend more time in their more productive activity and don't waste time shifting from one task to another. Also, over time they will acquire more experience and skill.

Adam and Eve Trade

Adam would be willing to trade a pound of clams to Eve as long as he gets at least 2 pounds of berries in return. Eve will trade up to 4 pounds of berries in return for 1 pound of clams. If they exchange 1 pound of clams for 3 pounds of berries, both are better off after trade. Adam trades 3 pounds of clams to Eve for 9 pounds of berries Adam now has 5 (not 4) clams and 9 (not 8) berries. Eve now has 21 (not 20) berries with her 3 pounds of clams.

Gains from Trade
Specialization requires trade if people are to have a variety of goods. Voluntary trade occurs if both parties gain from it. People won't trade if they expect the exchange to make them worse off. Trade based on comparative advantage allows both parties to gain by acquiring goods at lower opportunity cost.

International Trade

Different countries have different mixtures of resources. As a result, the opportunity cost of producing varies among countries. Trade based on comparative advantage will result in greater total output and gains for all countries (although not necessarily each individual within a country) Countries will export goods in which they have a comparative advantage (which they can produce at lower opportunity cost).

Go to Oct. 2, part 2 for the remaining slides.