Chapter 3: Interdependence and Gains from Trade

1. Production Possibilities Frontier: combinations of output that the economy can produce
given the available factors of production and production technology
- Choose a point to consume in auturky (no trade)
Example:

- Better off with trade: if you have at least the same amount of one good and more of the
other good you can consume outside of your PPF

2. Advantages
Opportunity Cost: given up to obtain some item (ex. Going to University vs. Working)

Absolute Advantage: ability to produce a good with a smaller quantity of inputs

Example: It takes you 20 minutes to make a cake whereas it takes your friend 40 minutes to
make a cake. THEREFORE, you have the absolute advantage.

Comparative Advantage: ability to produce a good with a smaller opportunity cost

- One person/country cannot have a comparative advantage in both goods.