Interdependence and the Gains from Trade,Chapter 3,Copyright 2001 by Harcourt, Inc. All rights reserved. Requests for permission to make copies of any part of the work should be mailed to: Permissions Department, Harcourt College Publishers, 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: You wake up to an alarm clock made in Korea. You pour yourself some orange juice made from oranges grown in Florida. You put on some clothes made of cotton grown in Georgia and sewn in factories in Thailand. You watch the morning news broadcast from New York on your TV made in Japan. You 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!,Harcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc.,Interdependence and Trade,Remember, 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 do we satisfy our wants and needs in a global economy?,We can be economically self-sufficient. We can specialize and trade with others, leading to economic interdependence.,Harcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc.,Interdependence and Trade,A general observation . . . Individuals and 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 Trade,But, this gives rise to two questions: Why is interdependence the norm? What determines production and trade?,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 production 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.,Imagine . . . only two goods: potatoes and meat only two people: a potato farmer and a cattle rancher What should each produce? Why should they trade?,A Parable for the Modern Economy,Harcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc.,The Production Opportunities of the Farmer and the Rancher,Harcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc.,Self-Sufficiency,By ignoring each other: Each consumes what they each produce. The production possibilities frontier is also the consumption possibilities frontier. Without trade, economic gains are diminished.,Harcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc.,Production Possibilities Frontiers,Potatoes (pounds),Meat (pounds),4,2,(a) The Farmers Production Possibilities Frontier,0,Harcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc.,Production Possibilities Frontiers,Potatoes (pounds),Meat (pounds),5,40,(b) The Ranchers Production Possibilities Frontier,0,Harcourt, 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, and then trade with each other.,The farmer should produce potatoes. The rancher should produce meat.,Harcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc.,The Gains from Trade: A Summary,Harcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc.,The Gains from Trade: A Summary,Harcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc.,Trade Expands the Set of Consumption Possibilities,Potatoes (pounds),Meat (pounds),4,2,2,1,(a) How Trade Increases the Farmers Consumption,0,A,3,3,A*,Harcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc.,Trade Expands the Set of Consumption Possibilities,Potatoes (pounds),Meat (pounds),5,2.5,40,20,(b) How Trade Increases The Ranchers Consumption,0,B,21,3,B*,Harcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc.,The Gains from Trade: A Summary,Harcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc.,The Principle of Comparative Advantage,Who should produce what? How 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 Harcourt, Inc.,Differences in Costs of Production,The number of hours required to produce a unit of output. (for example, one pound of potatoes) The opportunity cost of sacrificing one good