Chapter%203 - ECON1200 Principles of Microeconomics Fall...

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ECON1200: Principles of Microeconomics Instructor: Ramsey Abu-Absi Fall 2009 Notes: Mankiw 5e Chapter 3 [email protected] Chapter 3 – Page 1 CHAPTER 3: Interdependence and the Gains from Trade (p. 49) Consider your typical day: You pour yourself juice made from oranges grown in Florida and coffee made from beans grown in Brazil. You watch the morning news broadcast from New York on your TV made in Japan. You put on some clothes made of cotton grown in Georgia and sewn in factories in Thailand. You drive to class in a car made of parts manufactured in more than a dozen different countries. Every day we depend upon people from around the world to provide us with goods and services. Most of these people are not known to us, and are not acting out of concern for our well-being. Instead, they provide these goods and services because they receive something in return. One of the Ten Principles of Economics presented in Chapter 1 is that trade makes everyone involved better off. A Parable for the Modern Economy The purpose of this chapter is to understand why people choose to trade and how this choice improves their lives. To start, we’ll take the example of a very simple economy, making the following assumptions: 1. There are only two goods in the world: meat and potatoes. 2. There are only two people in the world: a cattle rancher and a potato farmer. 3. Both of these people would like maximum variety in their diet: i.e. they would both like to eat both meat and potatoes. 4. The cattle rancher can only produce meat and the potato farmer can only produce potatoes. In this economy, the gains from trade are obvious - if the potato farmer and the cattle rancher agree to trade, they can both enjoy maximum dietary variety. Now let’s relax assumption number 4: assume now that each can produce the other good, but only at great expense. The gains from specialization and trade are still obvious.
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