1、Harcourt,Inc.items and derived items copyright 2001 by Harcourt,Inc.Interdependence and the Gains from TradeChapter 3Copyright 2001 by Harcourt,Inc.All rights reserved.Requests for permission to make copies of any part of thework should be mailed to:Permissions Department,Harcourt College Publishers
2、,6277 Sea Harbor Drive,Orlando,Florida 32887-6777.Harcourt,Inc.items and derived items copyright 2001 by Harcourt,Inc.Interdependence and Trade Consider your typical day:uYou wake up to an alarm clock made in Korea.uYou pour yourself some orange juice made from oranges grown in Florida.uYou put on s
3、ome clothes made of cotton grown in Georgia and sewn in factories in Thailand.uYou watch the morning news broadcast from New York on your TV made in Japan.uYou drive to class in a car made of parts manufactured in a half-dozen different countries.and you havent been up for more than two hours yet!Ha
4、rcourt,Inc.items and derived items copyright 2001 by Harcourt,Inc.Interdependence and TradeRemember,economics is the study of how societies produce and distribute goods in an attempt to satisfy the wants and needs of its members.Harcourt,Inc.items and derived items copyright 2001 by Harcourt,Inc.How
5、 do we satisfy our wants and needs in a global economy?uWe can be economically self-sufficient.uWe can specialize and trade with others,leading to economic interdependence.Harcourt,Inc.items and derived items copyright 2001 by Harcourt,Inc.Interdependence and TradeA general observation.Individuals a
6、nd nations rely on specialized production and exchange as a way to address problems caused by scarcity.Harcourt,Inc.items and derived items copyright 2001 by Harcourt,Inc.Interdependence and TradeBut,this gives rise to two questions:uWhy is interdependence the norm?uWhat determines production and tr
7、ade?Harcourt,Inc.items and derived items copyright 2001 by Harcourt,Inc.Why is interdependence the norm?Interdependence occurs because people are better off when they specialize and trade with others.Harcourt,Inc.items and derived items copyright 2001 by Harcourt,Inc.What determines the pattern of p
8、roduction and trade?Patterns of production and trade are based upon differences in opportunity costs.Harcourt,Inc.items and derived items copyright 2001 by Harcourt,Inc.uImagine.only two goods:potatoes and meatonly two people:a potato farmer and a cattle rancheruWhat should each produce?uWhy should
9、they trade?A Parable for the Modern EconomyHarcourt,Inc.items and derived items copyright 2001 by Harcourt,Inc.The Production Opportunities of the Farmer and the RancherHours Needed to Make 1 lb.of:Amount Produced in 40 HoursMeat PotatoesMeat PotatoesFarmer20 hours/lb 10 hours/lb2 lbs.4 lbs.Rancher1
10、 hours/lb 8 hours/lb.40 lbs.5 lbs.Harcourt,Inc.items and derived items copyright 2001 by Harcourt,Inc.Self-SufficiencyBy ignoring each other:uEach consumes what they each produce.uThe production possibilities frontier is also the consumption possibilities frontier.Without trade,economic gains are di
11、minished.Harcourt,Inc.items and derived items copyright 2001 by Harcourt,Inc.Production Possibilities FrontiersPotatoes(pounds)Meat(pounds)4212(a)The Farmers Production Possibilities Frontier0AHarcourt,Inc.items and derived items copyright 2001 by Harcourt,Inc.Production Possibilities FrontiersPotat
12、oes(pounds)Meat(pounds)540202.5(b)The Ranchers Production Possibilities Frontier0BHarcourt,Inc.items and derived items copyright 2001 by Harcourt,Inc.The Farmer and the Rancher Specialize and Trade Each would be better off if they specialized in producing the product they are more suited to produce,
13、and then trade with each other.uThe farmer should produce potatoes.uThe rancher should produce meat.Harcourt,Inc.items and derived items copyright 2001 by Harcourt,Inc.The Gains from Trade:A SummaryThe OutcomeWithout Trade:What They Produceand ConsumeFarmer1 lb meat (A)2 lbs potatoesRancher20 lbs me
14、at (B)2.5 lbs potatoesHarcourt,Inc.items and derived items copyright 2001 by Harcourt,Inc.The Gains from Trade:A SummaryThe OutcomeWith Trade:What TheyProduceWhat TheyTradeWhat TheyConsumeFarmer0 lbs meat 4 lbs potatoesGets 3 lbs meatfor 1 lb potatoes3 lbs meat (A*)3 lbs potatoesRancher24 lbs meat 2
15、 lbs potatoesGives 3 lbs meatfor 1 lb potatoes21 lbs meat (B*)3 lbs potatoesHarcourt,Inc.items and derived items copyright 2001 by Harcourt,Inc.Trade Expands the Set of Consumption PossibilitiesPotatoes(pounds)Meat(pounds)4221(a)How Trade Increases the Farmers Consumption0A33A*Farmers consumption wi
16、thout tradeFarmers consumption with tradeHarcourt,Inc.items and derived items copyright 2001 by Harcourt,Inc.Trade Expands the Set of Consumption PossibilitiesPotatoes(pounds)Meat(pounds)52.54020(b)How Trade Increases The Ranchers Consumption0B213B*Ranchers consumption without tradeRanchers consumpt
17、ion with tradeHarcourt,Inc.items and derived items copyright 2001 by Harcourt,Inc.The Gains from Trade:A SummaryThe GainsFrom Trade:The Increase in ConsumptionFarmer2 lbs meat (A*-A)1 lb potatoesRancher1 lb meat (B*-B)1/2 lb potatoesHarcourt,Inc.items and derived items copyright 2001 by Harcourt,Inc
18、.The Principle of Comparative AdvantageuWho should produce what?uHow much should be traded for each product?Who can produce potatoes at a lower cost-the farmer or the rancher?Differences in the costs of production determine the following:Harcourt,Inc.items and derived items copyright 2001 by Harcour
19、t,Inc.Differences in Costs of ProductionuThe number of hours required to produce a unit of output.(for example,one pound of potatoes)uThe opportunity cost of sacrificing one good for another.Two ways to measure differences in costs of production:Harcourt,Inc.items and derived items copyright 2001 by
20、 Harcourt,Inc.Absolute AdvantageuDescribes the productivity of one person,firm,or nation compared to that of another.uThe producer that requires a smaller quantity of inputs to produce a good is said to have an absolute advantage in producing that good.Harcourt,Inc.items and derived items copyright
21、2001 by Harcourt,Inc.Comparative AdvantageuCompares producers of a good according to their opportunity cost.uThe producer who has the smaller opportunity cost of producing a good is said to have a comparative advantage in producing that good.Harcourt,Inc.items and derived items copyright 2001 by Har
22、court,Inc.Specialization and TradeuWho has the absolute advantage?The farmer or the rancher?uWho has the comparative advantage?The farmer or the rancher?Harcourt,Inc.items and derived items copyright 2001 by Harcourt,Inc.Absolute AdvantageuThe Rancher needs only 8 hours to produce a pound of potatoe
23、s,whereas the Farmer needs 10 hours.uThe Rancher needs only 1 hour to produce a pound of meat,whereas the Farmer needs 20 hours.The Rancher has an absolute advantage in the production of both meat and potatoes.Harcourt,Inc.items and derived items copyright 2001 by Harcourt,Inc.The Opportunity Cost o
24、f Meat and PotatoesOpportunity Cost of:1 lb of Meat1 lb of PotatoesFarmer2 lb potatoes lb meatRancher1/8 lb potatoes8 lb meatHarcourt,Inc.items and derived items copyright 2001 by Harcourt,Inc.Comparative AdvantageuThe Ranchers opportunity cost of a pound of potatoes is 8 pounds of meat,whereas the
25、Farmers opportunity cost of a pound of potatoes is 1/2 pound of meat.uThe Ranchers opportunity cost of a pound of meat is only 1/8 pound of potatoes,while the Farmers opportunity cost of a pound of meat is 2 pounds of potatoes.Harcourt,Inc.items and derived items copyright 2001 by Harcourt,Inc.Compa
26、rative Advantageso,the Rancher has a comparative advantage in the production of meat but the Farmer has a comparative advantage in the production of potatoes.Harcourt,Inc.items and derived items copyright 2001 by Harcourt,Inc.The Principle of Comparative AdvantageuComparative advantage and differenc
27、es in opportunity costs are the basis for specialized production and trade.uWhenever potential trading parties have differences in opportunity costs,they can each benefit from trade.Harcourt,Inc.items and derived items copyright 2001 by Harcourt,Inc.Benefits of TradeTrade can benefit everyone in a s
28、ociety because it allows people to specialize in activities in which they have a comparative advantage.Harcourt,Inc.items and derived items copyright 2001 by Harcourt,Inc.Adam Smith and TradeIn his 1776 book An Inquiry into the Nature and Causes of the Wealth of Nations,Adam Smith performed a detail
29、ed analysis of trade and economic interdependence,which economists still adhere to today.Harcourt,Inc.items and derived items copyright 2001 by Harcourt,Inc.David Ricardo and TradeIn his 1816 book Principles of Political Economy and Taxation,David Ricardo developed the principle of comparative advan
30、tage as we know it today.Harcourt,Inc.items and derived items copyright 2001 by Harcourt,Inc.Should Tiger Woods Mow His Own Lawn?Harcourt,Inc.items and derived items copyright 2001 by Harcourt,Inc.SummaryuInterdependence and trade allow people to enjoy a greater quantity and variety of goods and ser
31、vices.Harcourt,Inc.items and derived items copyright 2001 by Harcourt,Inc.SummaryuThe person who can produce a good with a smaller quantity of inputs has an absolute advantage.uThe person with a smaller opportunity cost has a comparative advantage.Harcourt,Inc.items and derived items copyright 2001
32、by Harcourt,Inc.SummaryuThe gains from trade are based on comparative advantage,not absolute advantage.uComparative advantage applies to countries as well as to people.Harcourt,Inc.items and derived items copyright 2001 by Harcourt,Inc.Graphical ReviewHarcourt,Inc.items and derived items copyright 2
33、001 by Harcourt,Inc.Production Possibilities FrontiersPotatoes(pounds)Meat(pounds)4212(a)The Farmers Production Possibilities Frontier0AHarcourt,Inc.items and derived items copyright 2001 by Harcourt,Inc.Production Possibilities FrontiersPotatoes(pounds)Meat(pounds)540202.5(b)The Ranchers Production
34、 Possibilities Frontier0BHarcourt,Inc.items and derived items copyright 2001 by Harcourt,Inc.Trade Expands the Set of Consumption PossibilitiesPotatoes(pounds)Meat(pounds)4221(a)How Trade Increases the Farmers Consumption0A33A*Farmers consumption without tradeFarmers consumption with tradeHarcourt,Inc.items and derived items copyright 2001 by Harcourt,Inc.Trade Expands the Set of Consumption PossibilitiesPotatoes(pounds)Meat(pounds)52.54020(b)How Trade Increases The Ranchers Consumption0B213B*Ranchers consumption without tradeRanchers consumption with trade
