THE DRIVING FORCE OF SPECIALIZATION

The rancher’s explanation of the gains from trade though correct, poses a puzzle: If the rancher is better at both raising cattle and growing potatoes, how can the farmer ever specialize in doing what in does best? The farmer dosen’t seem to do anything best. To solve this puzzle, we need to look at the principle of comparative advantage.

As a first step in developing this principle, consider the following question: In the our example, who can produce potatoes at lower cost the farmer or the rancher? There are two possible answer and in these two answer lie the solution to our puzzle and the key ti understanding the gains from trade.

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