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InterdependenceandtheGainsfromTrade?2015CengageLearning.AllRightsReserved.Maynotbecopied,scanned,orduplicated,inwholeorinpart,exceptforuseaspermittedinalicensedistributedwithacertainproductorserviceorotherwiseonapassword-protectedwebsiteforclassroomuse.1AParablefortheModernEconomyOnlytwogoodsMeatPotatoesOnlytwopeopleAcattleranchernamedRoseApotatofarmernamedFrankBothwouldliketoeatbothmeatandpotatoes?2015CengageLearning.AllRightsReserved.Maynotbecopied,scanned,orduplicated,inwholeorinpart,exceptforuseaspermittedinalicensedistributedwithacertainproductorserviceorotherwiseonapassword-protectedwebsiteforclassroomuse.2AParablefortheModernEconomyIfRoseproducesonlymeatandFrankproducesonlypotatoesBothgainfromtradeIfbothRoseandFrankproducebothmeatandpotatoesBothgainfromspecializationandtradeProductionpossibilitiesfrontierVariousmixesofoutputthataneconomycanproduce?2015CengageLearning.AllRightsReserved.Maynotbecopied,scanned,orduplicated,inwholeorinpart,exceptforuseaspermittedinalicensedistributedwithacertainproductorserviceorotherwiseonapassword-protectedwebsiteforclassroomuse.3Figure1?2015CengageLearning.AllRightsReserved.Maynotbecopied,scanned,orduplicated,inwholeorinpart,exceptforuseaspermittedinalicensedistributedwithacertainproductorserviceorotherwiseonapassword-protectedwebsiteforclassroomuse.TheProductionPossibilitiesFrontier(a)Panel(a)showstheproductionopportunitiesavailabletoFrankthefarmerandRosetherancher.4Figure1?2015CengageLearning.AllRightsReserved.Maynotbecopied,scanned,orduplicated,inwholeorinpart,exceptforuseaspermittedinalicensedistributedwithacertainproductorserviceorotherwiseonapassword-protectedwebsiteforclassroomuse.TheProductionPossibilitiesFrontier(b,c)Panel(b)showsthecombinationsofmeatandpotatoesthatFrankcanproduce.Panel(c)showsthecombinationsofmeatandpotatoesthatRosecanproduce.BothproductionpossibilitiesfrontiersarederivedassumingthatFrankandRoseeachwork8hoursperday.Ifthereisnotrade,eachperson’sproductionpossibilitiesfrontierisalsohisorherconsumptionpossibilitiesfrontier.(b)Frank’sproductionpossibilitiesfrontier(c)Rose’sproductionpossibilitiesfrontierMeat(oz)048Potatoes(oz)1632AIfthereisnotrade,Frankchoosesthisproductionandconsumption.Meat(oz)01224Potatoes(oz)2448BIfthereisnotrade,Rosechoosesthisproductionandconsumption.5AParablefortheModernEconomySpecializationandtradeFarmerFrankspecializesingrowingpotatoesMoretimegrowingpotatoesLesstimeraisingcattleRancherRosespecializesinraisingcattleMoretimeraisingcattleLesstimegrowingpotatoesTrade:5ozofmeatfor15ozofpotatoes?2015CengageLearning.AllRightsReserved.Maynotbecopied,scanned,orduplicated,inwholeorinpart,exceptforuseaspermittedinalicensedistributedwithacertainproductorserviceorotherwiseonapassword-protectedwebsiteforclassroomuse.6Figure2?2015CengageLearning.AllRightsReserved.Maynotbecopied,scanned,orduplicated,inwholeorinpart,exceptforuseaspermittedinalicensedistributedwithacertainproductorserviceorotherwiseonapassword-protectedwebsiteforclassroomuse.HowTradeExpandstheSetofConsumptionOpportunities(a,b)TheproposedtradebetweenFrankthefarmerandRosetherancherofferseachofthemacombinationofmeatandpotatoesthatwouldbeimpossibleintheabsenceoftrade.Inpanel(a),FrankgetstoconsumeatpointA*ratherthanpointA.Inpanel(b),RosegetstoconsumeatpointB*ratherthanpointB.Tradeallowseachtoconsumemoremeatandmorepotatoes.(a)Frank’sproductionandconsumption(b)Rose’sproductionandconsumptionMeat(oz)048Potatoes(oz)1632AFrank'sproductionandconsumptionwithouttradeMeat(oz)01224Potatoes(oz)2448BRose’sproductionandconsumptionwithouttradeFrank'sproductionwithtrade517A*Frank'sconsumptionwithtrade13181227B*Rose’sconsumptionwithtradeRose’sproductionwithtrade7Figure2?2015CengageLearning.AllRightsReserved.Maynotbecopied,scanned,orduplicated,inwholeorinpart,exceptforuseaspermittedinalicensedistributedwithacertainproductorserviceorotherwiseonapassword-protectedwebsiteforclassroomuse.HowTradeExpandstheSetofConsumptionOpportunities(c)TheproposedtradebetweenFrankthefarmerandRosetherancherofferseachofthemacombinationofmeatandpotatoesthatwouldbeimpossibleintheabsenceoftrade.Inpanel(a),FrankgetstoconsumeatpointA*ratherthanpointA.Inpanel(b),RosegetstoconsumeatpointB*ratherthanpointB.Tradeallowseachtoconsumemoremeatandmorepotatoes.8ComparativeAdvantageAbsoluteadvantageTheabilitytoproduceagoodusingfewerinputsthananotherproducerInproducingmeat:RoseRoseneeds20min.toproduce1oz.ofmeatFrankneeds60minutesInproducingpotatoes:RoseRoseneeds10min.toproduce1oz.ofpotatoesFrankneeds15minutes?2015CengageLearning.AllRightsReserved.Maynotbecopied,scanned,orduplicated,inwholeorinpart,exceptforuseaspermittedinalicensedistributedwithacertainproductorserviceorotherwiseonapassword-protectedwebsiteforclassroomuse.9ComparativeAdvantageOpportunitycostWhatevermustbegivenuptoobtainsomeitemMeasuresthetrade-offbetweenthetwogoodsthateachproducerfaces?2015CengageLearning.AllRightsReserved.Maynotbecopied,scanned,orduplicated,inwholeorinpart,exceptforuseaspermittedinalicensedistributedwithacertainproductorserviceorotherwiseonapassword-protectedwebsiteforclassroomuse.10Table1?2015CengageLearning.AllRightsReserved.Maynotbecopied,scanned,orduplicated,inwholeorinpart,exceptforuseaspermittedinalicensedistributedwithacertainproductorserviceorotherwiseonapassword-protectedwebsiteforclassroomuse.TheOpportunityCostofMeatandPotatoes11ComparativeAdvantageComparativeadvantageTheabilitytoproduceagoodataloweropportunitycostthananotherproducerReflectstherelativeopportunitycostPrincipleofcomparativeadvantageEachgoodshouldbeproducedbytheindividualthathasthesmalleropportunitycostofproducingthatgoodSpecializeaccordingtocomparativeadvantage?2015CengageLearning.AllRightsReserved.Maynotbecopied,scanned,orduplicated,inwholeorinpart,exceptforuseaspermittedinalicensedistributedwithacertainproductorserviceorotherwiseonapassword-protectedwebsiteforclassroomuse.12ComparativeAdvantageOnepersonCanhaveabsoluteadvantageinbothgoodsCannothavecomparativeadvantageinbothgoodsFordifferentopportunitycostsOnepersonhascomparativeadvantageinonegoodTheotherpersonhascomparativeadvantageintheothergood?2015CengageLearning.AllRightsReserved.Maynotbecopied,scanned,orduplicated,inwholeorinpart,exceptforuseaspermittedinalicensedistributedwithacertainproductorserviceorotherwiseonapassword-protectedwebsiteforclassroomuse.13ComparativeAdvantageOpportunitycostofonegoodInverseoftheopportunitycostoftheotherGainsfromspecializationandtradeBasedoncomparativeadvantageTotalproductionineconomyrisesIncreaseinthesizeoftheeconomicpieEveryoneisbetteroff?2015CengageLearning.AllRightsReserved.Maynotbecopied,scanned,orduplicated,inwholeorinpart,exceptforuseaspermittedinalicensedistributedwithacertainproductorserviceorotherwiseonapassword-protectedwebsiteforclassroomuse.14ComparativeAdvantageTradecanbenefiteveryoneinsocietyAllowspeopletospecializeThepriceoftradeMustliebetweenthetwoopportunitycostsPrincipleofcomparativeadvantageexplains:InterdependenceGainsfromtrade?2015CengageLearning.AllRightsReserved.Maynotbecopied,scanned,orduplicated,inwholeorinpart,exceptforuseaspermittedinalicensedistributedwithacertainproductorserviceorotherwiseonapassword-protectedwebsiteforclassroomuse.15ApplicationsofComparativeAdvantageShouldTomBradyMowHisOwnLawn?Brady,in2hoursMowhislawn,orFilmaTVcommercial,earn$20,000ForestGump,in4hoursMowBrady’slawnWorkatMcDonald’s,earn$40?2015CengageLearning.AllRightsReserved.Maynotbecopied,scanned,orduplicated,inwholeorinpart,exceptforuseaspermittedinalicensedistributedwithacertainproductorserviceorotherwiseonapassword-protectedwebsiteforclassroomuse.16“Theydidanicejobmowingthisgrass.”ApplicationsofComparativeAdvantageShouldtheU.S.tradewithothercountries?ImportsGoodsproducedabroadandsolddomesticallyExportsGoodsproduceddomesticallyandsoldabroad?2015CengageLearning.AllRightsReserved.Maynotbecopied,scanned,orduplicated,inwholeorinpart,exceptforuseaspermittedinalicensedistributedwithacertainproductorserviceorotherwiseonapassword

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