Chapter 16 Section 1

Why Nations TradeTrade allows nations to specialize in some

products and then trade them for goods and services that are more expensive to produce

SpecializationWhen people specialize, they

produce things they do bestStates also specializeExports

The goods and services that a nation sells to other nations

ImportsThe goods and services that

a nation buys from other nationsExtent of Trade

Most exchanges are in goodsImport goods of 2008 amounted to

$1,645 billion

The Basis for TradeTrade works best when countries focus on those

products they can produce bestAbsolute Advantage

Absolute AdvantageCountry’s ability to produce more of a

given product than another country can produceProduction Possibilities Frontiers

Diagram showing the maximum combination of goods and/or services an economy can produce when all resources are fully employed

Comparative AdvantageComparative Advantage

Country’s ability to produce a given product relatively more efficiently than another country by doing it at a lower opportunity cost

Opportunity CostCost of the next best alternative use of

money, time, or resources when making a choiceThe Gains from Trade