chap 3 lect notes

chap 3 lect notes - Interdependence and trade...

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1 Interdependence and the gains from trade Chapter 3 Interdependence and trade ± Economic interdependence is a predominant characteristic of our country and our world. ² People dependent on other people. ² Countries dependent on other countries. ± Economists want to explain interdependence, because it goes to the heart of the way society organizes production and distribution . How do we satisfy our wants and needs? Two basic alternatives are available: 1. We can be economically self-sufficient. 2. We can specialize and trade with others, leading to economic interdependence. The overwhelming choice is trade; not self-sufficiency ± Individuals and nations rely on specialized production and exchange as a way to address problems caused by scarcity. ± Individuals and nations who have less “commerce” with others are inevitably not well off. Interdependence and trade ± This gives rise to two questions. . ² Why is interdependence the norm? ² What determines production and trade? A parable for the modern economy ± Imagine . . . . . Only two goods (potatoes; meat). . . Only two people (potato farmer; cattle rancher). ± What should each produce? ± Why should they trade?
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2 The production opportunities of the farmer and the rancher Meat Potatoes Farmer 20 hours/lb 10 hours/lb Rancher 1 hours/lb 8 hours/lb. Hours needed to make 1 pound of . . The production opportunities of the farmer and the rancher ?? ?? 8 hours/lb. 1 hour/ lb. Rancher ?? 40/20 = 2 lbs. 10 hours/lb. 20 hours/lb. Farmer Potatoes Meat Potatoes Meat Amount Produced in 40 hours … Hours needed to make 1 pound of … The production opportunities of the farmer and the rancher 40/8 = 5 lbs. 40/1 = 40 lbs. 8 hours/lb. 1 hour/ lb. Rancher 40/10 = 4 lbs. 40/20 = 2 lbs. 10 hours/lb. 20 hours/lb. Farmer Potatoes Meat Potatoes Meat Amount Produced in 40 hours … Hours needed to make 1 pound of … Self-sufficiency ± By ignoring each other: ² Each consumes what they each produce.
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This note was uploaded on 05/09/2008 for the course ECON 0100 taught by Professor Kenkel during the Spring '08 term at Pittsburgh.

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chap 3 lect notes - Interdependence and trade...

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