Ch02 - Exchange - Chapter2...

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Chapter 2 Efficiency, Exchange, and Comparative Advantage
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2 Introduction This chapter explores these questions: Why do we need to trade? Does trade increase wealth? Who profits from trading? We often say that “trade can make everyone  better off”. What exactly do people gain when they trade with  one another?
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3 Good and Bads Something is Good  if more  of it is preferred to  less . Something is Bad  if … less  of it is preferred to  more . A Free good  can be acquired without sacrifice . A Scarce good  requires sacrifice .
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4 The Myth of Material Wealth Of what does wealth consist? Wealth, in the economic way of thinking, is whatever  people value. Value is in the eyes of the chooser.
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5 The Myth of Material Wealth Economic growth  consists not in increasing  production of things, but increasing the  production of wealth. “Wealth = Material things” is not  a valid claim.  It blocks an understanding of such aspects of  economic life like “specialization and exchange”.
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6 Interdependence & Gains from Trade Suppose that Jack has a ball and Jim has a pair  of gloves. Jack: Value of glove > Value of ball Jim: Value of ball > Value of glove Question: Does an exchange of a ball for a glove,  between two people, affect wealth?
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7 Interdependence & Gains from Trade With trade each party trades a scarce and  valuable good for a more valued  good. Any choice entails a  trade-off ”. In economics, the cost of obtaining anything is the  value placed on whatever must be sacrificed in  order to obtain it. The cost is referred to as the  opportunity cost ” –  the  highest-valued option forgone.
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8 More on Opportunity Cost Case I: You, your girlfriend, and Andy Lau Case II: Marriage in Hong Kong and Saudi  Arabia
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9 Interdependence & Gains from Trade How do we satisfy our wants and needs in a  global economy?  We can be economically self-sufficient. We can specialize and trade with others, leading to  economic interdependence.
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10 Interdependence & Gains from Trade Individuals and nations rely on specialized  production and exchange as a way to address  problems caused by scarcity.  But this gives rise to two questions: Why is interdependence the norm? What determines production and trade?
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11 Interdependence & Gains from Trade Why is interdependence the norm?  Interdependence occurs because people are better off  when they specialize and trade with others.  What determines the pattern of production and  trade?  Patterns of production and trade are based upon  differences in opportunity costs .
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A Parable for the Economy Imagine… Only two goods, potatoes and meat Only two people, a potatoes farmer and a cattle  rancher
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Ch02 - Exchange - Chapter2...

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