Lecture_6 - Consider your typical day: You wake up to an...

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Consider your typical day: 0. You wake up to an alarm clock made in Korea. 1. You pour yourself orange juice made from Florida oranges and coffee from beans grown in Brazil. 2. You put on some clothes made of cotton grown in Georgia and sewn in factories in Thailand. 3. You watch the morning news broadcast from New York on your TV made in Japan. 4. 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 their members. Interdependence and the Gains from Trade 0. How do we satisfy our wants and needs in a global economy? 0. We can be economically self-sufficient. 1. We can specialize and trade with others, leading to economic interdependence. Interdependence and the Gains from Trade 1. Individuals and nations rely on specialized production and exchange as a way to address problems caused by scarcity. 2. But this gives rise to two questions: 2. Why is interdependence the norm? 3. What determines production and trade? Interdependence and the Gains from Trade 3. Why is interdependence the norm? 4. Interdependence occurs because people are better off when they specialize and trade with others. 4. What determines the pattern of production and trade? 5. Patterns of production and trade are based upon differences in opportunity costs.
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Imagine an economic system with only two goods, potatoes and meat and only two people, a potato farmer and a cattle rancher 5.What should each person produce? 6.Why should these people trade? Production Possibilities 5. Suppose the farmer and rancher decide not to engage in trade: 7. Each consumes only what he or she can produce alone. 8. The production possibilities frontier is also the consumption possibilities frontier. 9. Without trade, economic gains are diminished. Figure 1 The Production Possibilities Frontier Figure 1 The Production Possibilities Curve Production and Consumption Without Trade Specialization and Trade 6. Suppose instead the farmer and the rancher decide to specialize and trade… 10.Both would be better off if they specialize in producing the product they are more suited to produce, and then trade with each other. Figure 2 How Trade Expands the Set of Consumption Opportunities Figure 2 How Trade Expands the Set of Consumption Opportunities COMPARATIVE ADVANTAGE 7. Differences in the costs of production determine the following: 6. Who should produce what? 7. How much should be traded for each product? COMPARATIVE ADVANTAGE 8. Two ways to measure differences in costs of production: 8. The number of hours required to produce a unit of output (for example, one pound of potatoes). 9. The opportunity cost of sacrificing one good for another.
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Lecture_6 - Consider your typical day: You wake up to an...

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