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InterdependenceandtheGainsfromTrade1©2011CengageLearning.AllRightsReserved.Maynotbecopied,scanned,orduplicated,inwholeorinpart,exceptforuseaspermittedinalicensedistributedwithacertainproductorserviceorotherwiseonapassword-protectedwebsiteforclassroomuse.\nAParablefortheModernEconomyOnlytwogoodsMeatPotatoesOnlytwopeopleRancherFarmer2©2011CengageLearning.AllRightsReserved.Maynotbecopied,scanned,orduplicated,inwholeorinpart,exceptforuseaspermittedinalicensedistributedwithacertainproductorserviceorotherwiseonapassword-protectedwebsiteforclassroomuse.\nAParablefortheModernEconomyIfrancherproducesonlymeatAndfarmerproducesonlypotatoesBothgainfromtradeIfbothrancherandfarmerproducebothmeatandpotatoesBothgainfromspecializationandtradeProductionpossibilitiesfrontierVariousmixesofoutputthataneconomycanproduce3©2011CengageLearning.AllRightsReserved.Maynotbecopied,scanned,orduplicated,inwholeorinpart,exceptforuseaspermittedinalicensedistributedwithacertainproductorserviceorotherwiseonapassword-protectedwebsiteforclassroomuse.\nFigure14©2011CengageLearning.AllRightsReserved.Maynotbecopied,scanned,orduplicated,inwholeorinpart,exceptforuseaspermittedinalicensedistributedwithacertainproductorserviceorotherwiseonapassword-protectedwebsiteforclassroomuse.TheProductionPossibilitiesFrontier(a)Panel(a)showstheproductionopportunitiesavailabletothefarmerandtherancher.\nFigure15©2011CengageLearning.AllRightsReserved.Maynotbecopied,scanned,orduplicated,inwholeorinpart,exceptforuseaspermittedinalicensedistributedwithacertainproductorserviceorotherwiseonapassword-protectedwebsiteforclassroomuse.TheProductionPossibilitiesFrontier(b,c)Panel(b)showsthecombinationsofmeatandpotatoesthatthefarmercanproduce.Panel(c)showsthecombinationsofmeatandpotatoesthattheranchercanproduce.Bothproductionpossibilitiesfrontiersarederivedassumingthatthefarmerandranchereachwork8hoursperday.Ifthereisnotrade,eachperson’sproductionpossibilitiesfrontierisalsohisorherconsumptionpossibilitiesfrontier.(b)Thefarmer’sproductionpossibilitiesfrontier(c)Therancher’sproductionpossibilitiesfrontierMeat(oz)048Potatoes(oz)1632AIfthereisnotrade,thefarmerchoosesthisproductionandconsumption.Meat(oz)01224Potatoes(oz)2448BIfthereisnotrade,therancherchoosesthisproductionandconsumption.\nAParablefortheModernEconomySpecializationandtradeFarmer–specializeingrowingpotatoesMoretimegrowingpotatoesLesstimeraisingcattleRancher–specializeinraisingcattleMoretimeraisingcattleLesstimegrowingpotatoesTrade:5ozofmeatfor15ozofpotatoesBothgainfromspecializationandtrade6©2011CengageLearning.AllRightsReserved.Maynotbecopied,scanned,orduplicated,inwholeorinpart,exceptforuseaspermittedinalicensedistributedwithacertainproductorserviceorotherwiseonapassword-protectedwebsiteforclassroomuse.\nFigure27©2011CengageLearning.AllRightsReserved.Maynotbecopied,scanned,orduplicated,inwholeorinpart,exceptforuseaspermittedinalicensedistributedwithacertainproductorserviceorotherwiseonapassword-protectedwebsiteforclassroomuse.HowTradeExpandstheSetofConsumptionOpportunities(c)Theproposedtradebetweenthefarmerandtherancherofferseachofthemacombinationofmeatandpotatoesthatwouldbeimpossibleintheabsenceoftrade.Inpanel(a),thefarmergetstoconsumeatpointA*ratherthanpointA.Inpanel(b),theranchergetstoconsumeatpointB*ratherthanpointB.Tradeallowseachtoconsumemoremeatandmorepotatoes.\nFigure28©2011CengageLearning.AllRightsReserved.Maynotbecopied,scanned,orduplicated,inwholeorinpart,exceptforuseaspermittedinalicensedistributedwithacertainproductorserviceorotherwiseonapassword-protectedwebsiteforclassroomuse.HowTradeExpandstheSetofConsumptionOpportunities(a,b)Theproposedtradebetweenthefarmerandtherancherofferseachofthemacombinationofmeatandpotatoesthatwouldbeimpossibleintheabsenceoftrade.Inpanel(a),thefarmergetstoconsumeatpointA*ratherthanpointA.Inpanel(b),theranchergetstoconsumeatpointB*ratherthanpointB.Tradeallowseachtoconsumemoremeatandmorepotatoes.(a)Thefarmer’sproductionandconsumption(b)Therancher’sproductionandconsumptionMeat(oz)048Potatoes(oz)1632AFarmer'sproductionandconsumptionwithouttradeMeat(oz)01224Potatoes(oz)2448BRancher’sproductionandconsumptionwithouttradeFarmer'sproductionwithtrade517A*Farmer'sconsumptionwithtrade13181227B*Rancher’sconsumptionwithtradeRancher’sproductionwithtrade\nComparativeAdvantageAbsoluteadvantageProduceagoodusingfewerinputsthananotherproducerOpportunitycostWhatevermustbegivenuptoobtainsomeitemMeasuresthetrade-offbetweenthetwogoodsthateachproducerfaces9©2011CengageLearning.AllRightsReserved.Maynotbecopied,scanned,orduplicated,inwholeorinpart,exceptforuseaspermittedinalicensedistributedwithacertainproductorserviceorotherwiseonapassword-protectedwebsiteforclassroomuse.\nTable110©2011CengageLearning.AllRightsReserved.Maynotbecopied,scanned,orduplicated,inwholeorinpart,exceptforuseaspermittedinalicensedistributedwithacertainproductorserviceorotherwiseonapassword-protectedwebsiteforclassroomuse.TheOpportunityCostofMeatandPotatoesWhohasaloweropportunitycost(comparativeadvantage)inproducingmeat?Whohasloweropportunitycost(comparativeadvantage)inproducingpotatoes?Whoshouldproduce(specialize)onlymeat?Whoshouldproduceonlypotatoes?\nComparativeAdvantageComparativeadvantageProduceagoodataloweropportunitycostthananotherproducerReflectstherelativeopportunitycostPrincipleofcomparativeadvantageEachgood-producedbytheindividualthathasthesmalleropportunitycostofproducingthatgood11©2011CengageLearning.AllRightsReserved.Maynotbecopied,scanned,orduplicated,inwholeorinpart,exceptforuseaspermittedinalicensedistributedwithacertainproductorserviceorotherwiseonapassword-protectedwebsiteforclassroomuse.\nComparativeAdvantageOnepersonCanhaveabsoluteadvantageinbothgoodsCannothavecomparativeadvantageinbothgoodsFordifferentopportunitycostsOneperson-comparativeadvantageinonegoodTheotherperson-comparativeadvantageintheothergood12©2011CengageLearning.AllRightsReserved.Maynotbecopied,scanned,orduplicated,inwholeorinpart,exceptforuseaspermittedinalicensedistributedwithacertainproductorserviceorotherwiseonapassword-protectedwebsiteforclassroomuse.\nComparativeAdvantageOpportunitycostofonegoodInverseoftheopportunitycostoftheotherGainsfromspecializationandtradeBasedoncomparativeadvantageTotalproductionineconomyrisesIncreaseinthesizeoftheeconomicpieEveryone–betteroff13©2011CengageLearning.AllRightsReserved.Maynotbecopied,scanned,orduplicated,inwholeorinpart,exceptforuseaspermittedinalicensedistributedwithacertainproductorserviceorotherwiseonapassword-protectedwebsiteforclassroomuse.\nComparativeAdvantageTradecanbenefiteveryoneinsocietyAllowspeopletospecializeThepriceoftradeMustliebetweenthetwoopportunitycostsPrincipleofcomparativeadvantageexplains:InterdependenceGainsfromtrade14©2011CengageLearning.AllRightsReserved.Maynotbecopied,scanned,orduplicated,inwholeorinpart,exceptforuseaspermittedinalicensedistributedwithacertainproductorserviceorotherwiseonapassword-protectedwebsiteforclassroomuse.\nApplicationsofComparativeAdvantageShouldtheU.S.tradewithothercountries?U.SandJapanEachproducesfoodandcarsOneAmericanworker,onemonthOnecar,orTwotonsoffoodOneJapaneseworker,onemonthOnecarOnetonoffood15©2011CengageLearning.AllRightsReserved.Maynotbecopied,scanned,orduplicated,inwholeorinpart,exceptforuseaspermittedinalicensedistributedwithacertainproductorserviceorotherwiseonapassword-protectedwebsiteforclassroomuse.\nApplicationsofComparativeAdvantagePrincipleofcomparativeadvantageEachgood–producedbythecountrywiththesmalleropportunitycostofproducingthatgoodSpecializationandtradeAllcountrieshavemorefoodandmorecars16©2011CengageLearning.AllRightsReserved.Maynotbecopied,scanned,orduplicated,inwholeorinpart,exceptforuseaspermittedinalicensedistributedwithacertainproductorserviceorotherwiseonapassword-protectedwebsiteforclassroomuse.