Principles of Economics- Mankiw (5th) 53

Principles of Economics- Mankiw (5th) 53 - CHAPTER 3...

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CHAPTER 3 INTERDEPENDENCE AND THE GAINS FROM TRADE 55 and rancher share the benefits of this increased production. The moral of the story of the farmer and the rancher should now be clear: Trade can benefit everyone in so- ciety because it allows people to specialize in activities in which they have a comparative advantage. QUICK QUIZ: Robinson Crusoe can gather 10 coconuts or catch 1 fish per hour. His friend Friday can gather 30 coconuts or catch 2 fish per hour. What is Crusoe’s opportunity cost of catching one fish? What is Friday’s? Who has an absolute advantage in catching fish? Who has a comparative advantage in catching fish? APPLICATIONS OF COMPARATIVE ADVANTAGE The principle of comparative advantage explains interdependence and the gains from trade. Because interdependence is so prevalent in the modern world, the principle of comparative advantage has many applications. Here are two exam- ples, one fanciful and one of great practical importance. Economists have long under-
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