Unit 7

Specialization - individuals and countries can be made better off if they will produce in what they have a comparative advantage and then trade with others for whatever else they want/ need
Absolute and comparative advantage

• Absolute advantage the producer that can produce the most output OR requires the least amount of input
• Comparative advantage the producer with the lowest opportunity cost
• Countries should trade if they have a relatively lower opportunity cost
• An output problem presents the data as products produced given a set of resources
• An input problem presents the data as amount of resources needed to produce a fixed amount of output
• Identifying absolute advantage input problems change the scenario from who can produce a given amount of resources

Balance of trade: Exports + Imports
Balance of goods: good exports + services exports - goods imports + service imports
Balance on current account: Balance of goods: services + net investment + net transfers
Official Reserves: current account + capital account = 0