econ1_week2

econ1_week2 - Econ 1 Fall 2008 Week 2 Chapter 3...

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1 Chapter 3 Interdependence and the gains from trade Economic interdependence is the interaction between people or nations as sellers and buyers. Every day you enjoy goods and services provided by people from around the world. Now, we will learn why people – and nations – choose to be interdependent, and how they gain from trade. Remember one of the ten principles of economics from Chapter 1: Trade can make everyone better off. Example - There are two goods: wheat and computers - Two countries: A and B. - One resource: Labor There are two possible scenarios, when the countries choose to have nothing to do with each other and when they decide to trade. First scenario: They decide to be self-sufficient. Country A has 50,000 hours of labor available for production, per month. It takes 100 hours to produce one computer and 10 hours to produce one ton of wheat. Country B has 30,000 hours of labor available for production, per month. It takes 125 hours to produce one computer and 25 hours to produce one ton of wheat. Let’s see the Production Possibilities Frontier for each country. Econ 1 Fall 2008 Week 2
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2 ± Without trade, if each country uses half its labor to produce each of the two goods. In country A, consumers get 250 computers and 2500 tons wheat. In country B, consumers get 120 computers and 600 tons wheat. Two concepts before the second scenario ± Exports : goods produced domestically and sold abroad ± Imports : goods produced abroad and sold domestically Second scenario: They decide to trade. - Suppose the country A produces 3400 tons of wheat. With its remaining labor, this country is able to produce computers. - Suppose country B produces 240 computers. This country does not produce wheat because it is using all its labor in computers.
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This note was uploaded on 01/04/2009 for the course ECON 1 taught by Professor Crane during the Fall '08 term at UC Irvine.

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econ1_week2 - Econ 1 Fall 2008 Week 2 Chapter 3...

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