One of the ten principles of economics highlighted in chapter 1 is that trade can make everyone better off. This principle explains why people trade with their neighbors and why nations trade with other nations. In this chapter we examine this principle more closely. What exactly do people gain when they trade with one another? Why do people choose to become interdependent? | 3 Interdependence and the Gains from Trade Consider your typical day: You wake up to an alarm clock made in Korea. You pour yourself orange juice made from Florida oranges and coffee from beans grown in Brazil. 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 the Gains from 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. 2 Interdependence and the Gains from Trade How do we satisfy our wants and needs in a global economy? We can be economically self-sufficient. We can specialize and trade with others, leading to economic interdependence. 3 Interdependence and the Gains from Trade Individuals and nations | 3 Interdependence and the Gains from Trade Consider your typical day: You wake up to an alarm clock made in Korea. You pour yourself orange juice made from Florida oranges and coffee from beans grown in Brazil. 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 the Gains from 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. 2 Interdependence and the Gains from Trade How do we satisfy our wants and needs in a global economy? We can be economically self-sufficient. We can specialize and trade with others, leading to economic interdependence. 3 Interdependence and the Gains from Trade Individuals and nations rely on specialized production and exchange as a way to address problems caused by scarcity. But this gives rise to two questions: Why is interdependence the norm? What determines production and trade? 4 Interdependence and the Gains from Trade Why is interdependence the norm? Interdependence occurs because people are better off when they specialize and trade with others. What determines the pattern of production and trade? Patterns of production and trade are based upon differences in opportunity costs. 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? Table 1 The Production Opportunities of the Farmer and Rancher Copyright © 2004 South-Western Production Possibilities Self-Sufficiency By ignoring each other: Each consumes what they each produce. The production possibilities frontier is also the consumption possibilities frontier. Without trade, .
