1、Interdependence 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.
2、,1,A Parable for the Modern Economy,Only two goods Meat Potatoes Only two people A cattle rancher named Rose A potato farmer named Frank Both 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 f
3、or use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.,2,A Parable for the Modern Economy,If Rose produces only meat and Frank produces only potatoes Both gain from trade If both Rose and Frank produce both meat
4、and potatoes Both 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
5、 with a certain product or service or otherwise on a password-protected website for classroom use.,3,Figure 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 se
6、rvice 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.,4,Figure 1, 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or dupl
7、icated, 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 produc
8、e. 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 possibilitie
9、s frontier.,(b) Franks production possibilities frontier,(c) Roses production possibilities frontier,If there is no trade, Frank chooses this production and consumption.,If there is no trade, Rose chooses this production and consumption.,5,A Parable for the Modern Economy,Specialization and trade Fa
10、rmer Frank specializes in growing potatoes More time growing potatoes Less time raising cattle Rancher Rose specializes in raising cattle More 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, scan
11、ned, 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.,6,Figure 2, 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole
12、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 eac
13、h 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
14、 production and consumption,(b) Roses production and consumption,Franks production and consumption without trade,Roses production and consumption without trade,Franks production with trade,5,17,Franks consumption with trade,13,18,12,27,Roses consumption with trade,Roses production with trade,7,Figur
15、e 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 Consump
16、tion 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
17、point B* rather than point B. Trade allows each to consume more meat and more potatoes.,8,Comparative Advantage,Absolute advantage The ability to produce a good using fewer inputs than another producer In producing meat: Rose Rose needs 20 min. to produce 1 oz. of meat Frank needs 60 minutes In prod
18、ucing potatoes: Rose Rose needs 10 min. to produce 1 oz. of potatoes Frank needs 15 minutes, 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
19、 on a password-protected website for classroom use.,9,Comparative Advantage,Opportunity cost Whatever must be given up to obtain some item Measures the trade-off between the two goods that each producer faces, 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in
20、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.,10,Table 1, 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for
21、use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.,The Opportunity Cost of Meat and Potatoes,11,Comparative Advantage,Comparative advantage The ability to produce a good at a lower opportunity cost than another
22、producer Reflects the relative opportunity cost Principle of comparative advantage Each good should be produced by the individual that has the smaller opportunity cost of producing that good Specialize according to comparative advantage, 2015 Cengage Learning. All Rights Reserved. May not be copied,
23、 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.,12,Comparative Advantage,One person Can have absolute advantage in both goods Cannot have comparative a
24、dvantage in both goods For different opportunity costs One person has comparative advantage in one good The other person has comparative advantage in the other good, 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitte
25、d in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.,13,Comparative Advantage,Opportunity cost of one good Inverse of the opportunity cost of the other Gains from specialization and trade Based on comparative advantage Total pro
26、duction in economy rises Increase in the size of the economic pie Everyone is better off, 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
27、 a password-protected website for classroom use.,14,Comparative Advantage,Trade can benefit everyone in society Allows people to specialize The price of trade Must lie between the two opportunity costs Principle of comparative advantage explains: Interdependence Gains from trade, 2015 Cengage Learni
28、ng. 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.,15,Applications of Comparative Advantage,Should Tom Brady Mo
29、w His Own Lawn? Brady, in 2 hours Mow his lawn, or Film a TV commercial, earn $20,000 Forest Gump, in 4 hours Mow Bradys lawn Work at McDonalds, earn $40, 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 lice
30、nse distributed with a certain product or service or otherwise on a password-protected website for classroom use.,16,“ They did a nice job mowing this grass.”,Applications of Comparative Advantage,Should the U.S. trade with other countries? Imports Goods produced abroad and sold domestically Exports
31、 Goods produced domestically and sold abroad, 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
32、use.,17,Applications of Comparative Advantage,Should the U.S. trade with other countries? U.S and Japan Each produces food and cars One American worker, one month One car, or Two tons of food One Japanese worker, one month One car One ton of food, 2015 Cengage Learning. All Rights Reserved. May not
33、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.,18,Applications of Comparative Advantage,Principle of comparative advantage Each good should
34、be produced by the country with the smaller opportunity cost of producing that good Specialization and trade All countries have more food and more cars, 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.,19,
