Chapter 34

Chapter 34

Interdependence and the Gains from Trade Chapter 3 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. How do we satisfy our wants and needs in a global economy? We can be economically selfsufficient. We can specialize and trade with others,

leading to economic interdependence (I.e. Globalization) A Parable for the Modern Economy 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? The Production Opportunities of the Farmer and the Rancher Farmer Rancher Hours Needed to Make 1 lb. of: Meat Potatoes 20 hours/lb 10 hours/lb 1 hours/lb 8 hours/lb. Amount Produced in 40 Hours

Meat Potatoes 2 lbs. 4 lbs. 40 lbs. 5 lbs. Production Possibilities Frontiers Meat (pounds) (a) The Farmers Production Possibilities Frontier 2 1

0 A 2 4 Potatoes (pounds) Meat (pounds) Production Possibilities Frontiers 40

(b) The Ranchers Production Possibilities Frontier B 20 0 2.5 5 Potatoes (pounds)

The Gains from Trade: A Summary Farmer Rancher The Outcome Without Trade: What They Produce and Consume 1 lb meat (A) 2 lbs potatoes 20 lbs meat (B) 2.5 lbs potatoes The Gains from Trade: A Summary

Farmer Rancher The Outcome With Trade: What They Produce 0 lbs meat 4 lbs potatoes 24 lbs meat 2 lbs potatoes What They Trade Gets 3 lbs meat for 1 lb potatoes

Gives 3 lbs meat for 1 lb potatoes What They Consume 3 lbs meat ( A*) 3 lbs potatoes 21 lbs meat ( B*) 3 lbs potatoes Trade Expands the Set of Consumption Possibilities (a) How Trade Increases the Farmers Consumption Meat

(pounds) Farmers consumptio n with trade A* 3 Farmers consumptio n without trade 2 1

0 A 2 3 4 Potatoes (pounds) Trade Expands the Set of Consumption Meat 40 Possibilities (pounds)

(b) How Trade Increases The Ranchers Consumption 21 20 B* Ranchers consumptio n with trade B Ranchers consumptio n without

trade 0 2.5 3 5 Potatoes (pounds) The Gains from Trade: A Summary Farmer Rancher

The Gains From Trade: The Increase in Consumption 2 lbs meat (A*- A) 1 lb potatoes 1 lb meat (B*- B) 1/2 lb potatoes 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. The Principle of Comparative Advantage Differences in the costs of production determine the following: 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? Absolute Advantage Describes the productivity of one person,

firm, or nation compared to that of another. Absolute advantage can be measured in two ways: Least number of hours to produce a good. Most number of goods produced in a given amount of time. Comparative Advantage Compares producers of a good according to their opportunity cost.

The producer who has the smaller opportunity cost of producing a good is said to have a comparative advantage in producing that good. The Opportunity Cost of Meat and Potatoes 1 pound of meat 1 pound of potatoes Farmer 2 pounds of

potatoes 1/2 pound of meat Rancher 1/8 pounds of potatoes 8 pounds of meat Should Tiger Woods Mow His Own Lawn? ?

? ? What are the pros and cons of Globalization? Globalization means that free trade is spread to all corners of the world with no hindrances. Globalization Vide o

Recently Viewed Presentations

  • Day 28 - review for Exam 4 - part a

    Day 28 - review for Exam 4 - part a

    Sun becomes a giant, it will draw its energy from a hydrogen fusing. shell that surrounds a compact helium-rich core. The. helium core will have a diameter of only 30,000 km. The. Sun's diameter will be about 100 times larger,...
  •  We develop sustainable solutions for  Today and tomorrows

    We develop sustainable solutions for Today and tomorrows

    Constant re-assessment of course & content that. Allows students to explore & grow. Critically assess & evaluate information. Excellence in fundamentals . ... CALS research program is critical to partners and stakeholders. Relationship building.
  • a place of mind FACULTY OF EDUCATION Department

    a place of mind FACULTY OF EDUCATION Department

    The Canadarm2 was launched to the ISS in 2001, to replace the original Canadarm as a larger, more technologically advanced robotic "arm." ... Solution Cont'd The diagram below is a basic representation of how sonar sends and receives sound waves...
  • Lately in class 5-301 we have been exploring

    Lately in class 5-301 we have been exploring

    (Jane Goodall, Birute Mary Galdikas, and Diane Fossey were called Leakey's angels, [Leakey was the man that send these three women to study on the three primates, the chimpanzees, orangutans and gorillas, known as the great ape]). She is still...
  • Brazeldazzle's World

    Brazeldazzle's World

    Brazeldazzle's World Chris Brazelton 6'5" SG Welcome to my world. Me and My Brother My Pops in the Air Young Brazelton as a Bulldog My Playground The Savemart Center born in November 2003.
  • Napoleon Bonaparte

    Napoleon Bonaparte

    End of the French Revolution Napoleon's Empire Downfall 100 Days Napoleon's Exile and Death Congress of Vienna Napoleon created a huge empire between 1804-1812 Napoleon's invasions made people aware of their loyalty to their own nation - they did not...
  • National Telecommunication Networks

    National Telecommunication Networks

    Status of Implementation at RTH Tokyo Doc. 2 (2) Presentation version RA II/ICM-GTS 2003 (Moscow, 8 to 10 September 2003) Contents 1. GTS facilities
  • Year 6 SPAG Spring term - landt.xaviercet.org.uk

    Year 6 SPAG Spring term - landt.xaviercet.org.uk

    2/ Add a suitable suffix to the words below. coward wood love friend. 3/ Write 2 sentences. Use the word wait as a verb and a noun. 4/ Identify all the pronouns. She bought her Mum a new watch as...