PowerPoint Slides prepared by: Andreea CHIRITESCUEastern Illinois University3Interdependence and the Gains from Trade 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.1A Parable for the Modern Economy Only two goodsMeatPotatoes Only two peopleA cattle rancher named Rose A potato farmer named FrankBoth would like to eat both meat and potatoes 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.2A Parable for the Modern Economy If Rose produces only meat and Frank produces only potatoesBoth gain from trade If both Rose and Frank produce both meat and potatoesBoth gain from specialization and trade Production possibilities frontier Various mixes of output that an economy can produce 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.3Figure 1 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.The Production Possibilities Frontier (a)Panel (a) shows the production opportunities available to Frank the farmer and Rose the rancher.4Figure 1 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.The Production Possibilities Frontier (b, c)Panel (b) shows the combinations of meat and potatoes that Frank can produce. Panel (c) shows the combinations of meat and potatoes that Rose can produce. Both production possibilities frontiers are derived assuming that Frank and Rose each work 8 hours per day. If there is no trade, each persons production possibilities frontier is also his or her consumption possibilities frontier.(b) Franks production possibilities frontier(c) Roses production possibilities frontierMeat (oz)048Potatoes (oz)1632AIf there is no trade, Frank chooses this production and consumption.Meat (oz)01224Potatoes (oz)2448BIf there is no trade, Rose chooses this production and consumption.5A Parable for the Modern Economy Specialization and tradeFarmer Frank specializes in growing potatoesMore time growing potatoes Less time raising cattleRancher Rose specializes in raising cattleMore time raising cattle Less time growing potatoes Trade: 5 oz of meat for 15 oz of potatoes 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.6Figure 2 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.How Trade Expands the Set of Consumption Opportunities (a, b)The proposed trade between Frank the farmer and Rose the rancher offers each of them a combination of meat and potatoes that would be impossible in the absence of trade. In panel (a), Frank gets to consume at point A* rather than point A. In panel (b), Rose gets to consume at point B* rather than point B. Trade allows each to consume more meat and more potatoes.(a) Franks production and consumption(b) Roses production and consumptionMeat (oz)048Potatoes (oz)1632AFranks production and consumption without tradeMeat (oz)01224Potatoes (oz)2448BRoses production and consumption without tradeFranks production with trade517A*Franks consumption with trade13181227B*Roses consumption with tradeRoses production with trade7Figure 2 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.How Trade Expands the Set of Consumption Opportunities (c)The proposed trade between Frank the farmer and Rose the rancher offers each of them a combination of meat and potatoes that would be impossible in the absence of trade. In panel (a), Frank gets to consume at point A* rather than point A. In panel (b), Rose gets to consume at point B* rather than point B. Trade allows each to co