• What are the Gains?
• What should each country specialize in and trade?
• What are the terms of trade that make it mutually advantageous?

It is okay for a country to trade internationally, as long as they export more than the import

• Demands a positive balance for trade

Price-specie flow mechanism "Gold Standard"

• How much gold you have is how much cash you would receive
• Payments were only made in Gold
• Surplus turning into deficit eventually (inflation)

• Because countries immediately shipped out the gold they got in order to do other things (conquests, infrastructure).
• This would generate inflation

• Never going to run a trade deficit
• Insecure nations
• Japan, China

• Land (natural resources)
• Labor
• Capital (means of production) "machinery"

• Father of modern micro-economics (classical economist)
• Wealth of Nations
• Critiqued Mercantlism
• Labor is the most important factor

• opportunity cost
• comparative advantage (what is the sacrifice each country makes to produce these products)
• "When opportunity cost is the same, then they should not trade"

• Specialize in one product, because it's price is cheaper
• Relative Commodity Price

(expresses same currency, eliminated problem of the currency)

(all factors of production are involved)

• Production Possibility Frontier Curve
• (Is a locus)
• All points are different combinations of two products which result in a production where all resources are used
• (Full use of resources in a country)

• Marginal Rate of Transformation
• Slope of PPF
• how much production of one product a nation must sacrifice in order to produce an additional unit

• Constant
• Ratio is always the same for MRT
• Specialization is complete

change in Y

change in X

• Theory is helpful when the explain the past or help you predict the future
• 80% success rate
• When you are following someone's theory, must follow their recipe
• 1Wus = 2Wuk (1937)

• Ever increasing slope
• As you produce more and more of a product, you're giving up more and more of the other product
• specialization is partial

• To see what consumers preferences are
• Combination of 2 products which yield the same amount of utility (Consumption for pleasure)
• Can never intercept
• Goal is to reach highest possbile indifference curve
• Ever decreasing opportunity cost
• MRS

• Utility that comes from the consumption of an additional product

• Marginal Rate of Substitution
• Hiw much consumers are willing to give up in order to get an additional unit

• Autarky
• Best you can achieve given the circumstances
• 2 groups have reached the highest point of stability

• 2 countrys, 2 commodoties, 2 factors of production
• "Factors of Production" are free to move domesticlaly, but not internationally
• Goal is to reach economies of scale

W = Labor

r = K