Interdependence and The Gains From Trade
Interdependence and The Gains From Trade
Interdependence and The Gains From Trade
Chapter 3
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 haven’t been up for more than two hours
yet!
Interdependence and Trade
A general observation . . .
Individuals and nations rely on
specialized production and
exchange as a way to address
problems caused by scarcity.
Interdependence and Trade
Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc.
What determines the pattern of
production and trade?
Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc.
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
2
A
1
0 2 4 Potatoes (pounds)
Production Possibilities
Meat 40
(pounds)
Frontiers
(b) The Rancher’s Production
Possibilities Frontier
20 B
Farmer’s
A* consumption
3 with trade
2 Farmer’s
consumption
A without trade
1
0 2 3 4 Potatoes (pounds)
Trade Expands the Set of
Meat 40
(pounds)
Consumption Possibilities
(b) How Trade Increases The
Rancher’s Consumption
Rancher’s
21 B* consumption
20 with trade
B
Rancher’s
consumption
without trade
?
? ?
Summary
2
A
1
0 2 4 Potatoes (pounds)
Production Possibilities
Meat 40
(pounds)
Frontiers
(b) The Rancher’s Production
Possibilities Frontier
20 B
Farmer’s
A* consumption
3 with trade
2 Farmer’s
consumption
A without trade
1
0 2 3 4 Potatoes (pounds)
Trade Expands the Set of
Meat 40
(pounds)
Consumption Possibilities
(b) How Trade Increases The
Rancher’s Consumption
Rancher’s
21 B* consumption
20 with trade
B
Rancher’s
consumption
without trade