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? | 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. 2 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 (. Globalization) 3 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? A Parable for the Modern Economy The Production Opportunities of the Farmer and the Rancher Production Possibilities Frontiers Potatoes (pounds) Meat (pounds) 4 2 1 2 (a) The Farmer’s Production Possibilities Frontier 0 A 7 Production Possibilities Frontiers Potatoes (pounds) Meat (pounds) 5 40 20 (b) The Rancher’s Production Possibilities Frontier 0 B 7 The Gains from Trade: A Summary The Gains from Trade: A Summary . | 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. 2 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 (. Globalization) 3 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? A Parable for the Modern Economy The Production Opportunities of the Farmer and the Rancher Production Possibilities Frontiers Potatoes (pounds) Meat (pounds) 4 2 1 2 (a) The Farmer’s Production Possibilities Frontier 0 A 7 Production Possibilities Frontiers Potatoes (pounds) Meat (pounds) 5 40 20 (b) The Rancher’s Production Possibilities Frontier 0 B 7 The Gains from Trade: A Summary The Gains from Trade: A Summary Trade Expands the Set of Consumption Possibilities Potatoes (pounds) Meat (pounds) 4 2 2 1 (a) How Trade Increases the Farmer’s Consumption 0 A 3 3 A* Farmer’s consumption without trade Farmer’s consumption with trade 7 Trade Expands the Set of Consumption Possibilities Potatoes (pounds) Meat (pounds) 5 40 20 (b) How Trade Increases The Rancher’s Consumption 0 B 21 3 B* Rancher’s consumption without trade Rancher’s consumption with trade 7 The Gains from Trade: A Summary 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. 10 The Principle of Comparative Advantage 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? Differences in the costs of production determine the following: 11 Absolute Advantage .
