04/14/14 Specialization and Trade

• Specialization occurs when productive agents use their available resources to focus on producing one or a few products at which they are best suited.
• Some producers are better to produce certain items depending on their resources.
• International Trade occurs when buyers and sellers in two nations exchange with one another.
• Closed economy- A nation neither imports or exports products.
• Open economy- A nation imports and exports product. They specialize in for those they don't, a nation with an open economy can obtain more of both. 
• Cost ratios provide a method of comparing opportunity costs of producing certain items between producers.
• Lower cost ratio= lower opportunity cost. 
• Measures how much of one good must be surrendered for every unit of another good. 
• Can be compared between different nations for the same item or between different items within the same nation.
• Can be calculated using output or input data, both approaches lead to the same results if done correctly.
• Producers should specialize in making a product only when their cost ratio of doing so is less that that of their trading partners.
• Output problem approach is based on the most of an item each producer could make if it specializes using a set amount of resources. 
• Maximum output of item B/Maximum output of Item A
• How much of item B must be lost for every unit of item A gained by this producer. 
• Input problem approach is based on  the least resources each producer needs to make a set amount of an item (generally one unit)- these problems are stated in terms of resources per output unit.
• Resources needed for item A/ Resources needed for item B
• How much of item A will be gained for every unit of item B lost by this producer.
• Rules of specialization 
• In general, producers should specialize in making a product only when their cost ratio of doing so is less than that of their trading partners.
• The no advantage rule states that nations should not specialize or trade i neither trading partners possesses a cost advantage in producing either product.
• The absolute advantage states that two countries should specialize and trade when each partner has an output advantage over the other.
• The rule isn't always a reliable guide because having an output advantage doesn't guarantee a cost advantage. 
• The comparative advantage rule by David Ricardo states that two countries should specialize and trade, even if one produces more output of both products, as long as each partner has a cost advantage over the other. 
• Trade Possibilities Curve shows the amount of two items a country can obtain by specializing in one and trading for the other.
• The PPC assumes a closed economy where trade-offs must be made in how a nation uses its own resources.
• The TPC assumes an open economy where a nation is free to specialize its own production and trade with other nation.
• The nation with the lower opportunity cost has a comparative advantage in that particular item.