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7/26/2019 Chapter 03_Interdependence & Gains From Trade
1/18
PowerPoint Slides prepared by:Andreea CHIRITESCUEastern Illinois University
Interdependence and
the Gains fro Trade
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A Parable for the (odern Econoy
- .nly two %oods
/ (eat
/ Potatoes
- .nly two people/ Rancher
/ 0arer
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A Parable for the (odern Econoy
- If rancher prod*ces only eat
/And farer prod*ces only potatoes
/ 1oth %ain fro trade
- If both rancher and farer prod*ce botheat and potatoes
/ 1oth %ain fro speciali2ation and trade
- Prod*ction possibilities frontier/ 3ario*s i+es of o*tp*t that an econoy
can prod*ce
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0i%*re !
5" #$!! Cen%a%e &earnin%' All Ri%hts Reserved' (ay not be copied) scanned) or d*plicated) in whole or in part) e+cept for *se aseritted in a license distrib*ted with a certain rod*ct or service or otherwise on a assword, rotected website for classroo *se'
The Prod*ction Possibilities 0rontier 6a7
Panel 6a7 shows the prod*ction opport*nities available to the farer and the rancher'
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0i%*re !
8" #$!! Cen%a%e &earnin%' All Ri%hts Reserved' (ay not be copied) scanned) or d*plicated) in whole or in part) e+cept for *se aseritted in a license distrib*ted with a certain rod*ct or service or otherwise on a assword, rotected website for classroo *se'
The Prod*ction Possibilities 0rontier 6b) c7
Panel 6b7 shows the cobinations of eat and potatoes that the farer can prod*ce' Panel 6c7shows the cobinations of eat and potatoes that the rancher can prod*ce' 1oth prod*ctionpossibilities frontiers are derived ass*in% that the farer and rancher each wor9 ho*rs perday' If there is no trade) each person;s prod*ction possibilities frontier is also his or her
cons*ption possibilities frontier'
6b7 The farer;s prod*ction
possibilities frontier
6c7 The rancher;s prod*ction
possibilities frontier
(eat 6o27
$
5
Potatoes 6o27
!< 4#
A
If there is no trade) the farerchooses this prod*ction andcons*ption'
(eat 6o27
$
!#
#5
Potatoes 6o27
#5 5
1
If there is no trade) therancher chooses thisprod*ction and cons*ption'
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A Parable for the (odern Econoy
- Speciali2ation and trade
/ 0arer / speciali2e in %rowin% potatoes- (ore tie %rowin% potatoes
-&ess tie raisin% cattle
/ Rancher / speciali2e in raisin% cattle- (ore tie raisin% cattle
-&ess tie %rowin% potatoes
/ Trade: 8 o2 of eat for !8 o2 of potatoes
/ 1oth %ain fro speciali2ation and trade
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0i%*re #
=" #$!! Cen%a%e &earnin%' All Ri%hts Reserved' (ay not be copied) scanned) or d*plicated) in whole or in part) e+cept for *se aseritted in a license distrib*ted with a certain rod*ct or service or otherwise on a assword, rotected website for classroo *se'
How Trade E+pands the Set of Cons*ption .pport*nities 6a) b7
The proposed trade between the farer and the rancher offers each of the a cobination ofeat and potatoes that wo*ld be ipossible in the absence of trade' In panel 6a7) the farer %etsto cons*e at point A> rather than point A' In panel 6b7) the rancher %ets to cons*e at point 1>
rather than point 1' Trade allows each to cons*e ore eat and ore potatoes'
6a7 The farer;s prod*ction
and cons*ption
6b7 The rancher;s prod*ction
and cons*ption
(eat 6o27
$
5
Potatoes 6o27
!< 4#
A
0arer?s prod*ctionand cons*ptionwitho*t trade
(eat 6o27
$
!#
#5
Potatoes 6o27
#5 5
1
Rancher;sprod*ction andcons*ptionwitho*t trade
0arer?sprod*ctionwith trade
8
!=
A>
0arer?s
cons*ptionwith trade !4
!
!# #=
1> Rancher;scons*ptionwith trade
Rancher;s prod*ctionwith trade
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0i%*re #
" #$!! Cen%a%e &earnin%' All Ri%hts Reserved' (ay not be copied) scanned) or d*plicated) in whole or in part) e+cept for *se aseritted in a license distrib*ted with a certain rod*ct or service or otherwise on a assword, rotected website for classroo *se'
How Trade E+pands the Set of Cons*ption .pport*nities 6c7
The proposed trade between the farer and the rancher offers each of the acobination of eat and potatoes that wo*ld be ipossible in the absence of trade' Inpanel 6a7) the farer %ets to cons*e at point A> rather than point A' In panel 6b7) therancher %ets to cons*e at point 1> rather than point 1' Trade allows each to cons*eore eat and ore potatoes'
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Coparative Advanta%e
- Absol*te advanta%e
/ Prod*ce a %ood *sin% fewer inp*ts thananother prod*cer
- .pport*nity cost/ @hatever *st be %iven *p to obtain
soe ite
/ (eas*res the trade,off between the two%oods that each prod*cer faces
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Table !
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The .pport*nity Cost of (eat and Potatoes
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Coparative Advanta%e
- Coparative advanta%e
/ Prod*ce a %ood at a lower opport*nitycost than another prod*cer
/ Reflects the relative opport*nity cost- Principle of coparative advanta%e
/ Each %ood , prod*ced by the individ*al
that has the saller opport*nity cost ofprod*cin% that %ood
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Coparative Advanta%e
- .ne person
/ Can have absol*te advanta%e in both%oods
/ Cannot have coparative advanta%e inboth %oods
- 0or different opport*nity costs
/.ne person , coparative advanta%e inone %ood
/ The other person , coparative advanta%ein the other %ood
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Coparative Advanta%e
- .pport*nity cost of one %ood
/ Inverse of the opport*nity cost of the other
- Gains fro speciali2ation and trade
/ 1ased on coparative advanta%e/ Total prod*ction in econoy rises
- Increase in the si2e of the econoic pie
- Everyone / better off
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Coparative Advanta%e
- Trade can benefit everyone in society
/Allows people to speciali2e
- The price of trade
/ (*st lie between the two opport*nitycosts
- Principle of coparative advanta%e
e+plains:/ Interdependence
/ Gains fro trade
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Applications of Coparative Advanta%e
- Sho*ld To 1rady (ow His .wn &awnB
- 1rady) in # ho*rs
/ (ow his lawn) or
/ 0il a T3 coercial) earn #$)$$$- 0orest G*p) in 5 ho*rs
/ (ow 1rady;s lawn
/ @or9 at (cDonald;s) earn 5$
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Applications of Coparative Advanta%e
- Sho*ld the U'S' trade with otherco*ntriesB
- Iports
/ Goods prod*ced abroad and solddoestically
- E+ports
/ Goods prod*ced doestically and soldabroad
!
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Applications of Coparative Advanta%e
- Sho*ld the U'S' trade with otherco*ntriesB
/ U'S and apan- Each prod*ces food and cars
- .ne Aerican wor9er) one onth/ .ne car) or
/ Two tons of food
- .ne apanese wor9er) one onth/ .ne car
/ .ne ton of food
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Applications of Coparative Advanta%e
- Principle of coparative advanta%e
/ Each %ood / prod*ced by the co*ntry withthe saller opport*nity cost of prod*cin%that %ood
- Speciali2ation and trade
/All co*ntries have ore food and ore
cars
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