Chapter 3 - Interdependence and the gains from trade

Chapter 3 - Interdependence and the gains from trade -...

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Chapter Interdependence and the Gains from Trade 3
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A Parable for the Modern Economy Two goods: meat and potatoes Two people: rancher and farmer If rancher produces only meat And farmer produces only potatoes Both gain from trade If both rancher and farmer produce both meat and potatoes They still gain from specialization and trade 2
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Figure The production possibilities frontier (a) 1 3 (a) Production Opportunities Minutes needed to Make 1 ounce of: Amount produced in 8 hours Meat Potatoes Meat Potatoes Farmer Rancher 60 min/oz 20 min/oz 15 min/oz 10 min/oz 8 oz 24 oz 32 oz 48 oz Panel (a) shows the production opportunities available to the farmer and the rancher.
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Figure The production possibilities frontier (b, c) 1 4 (b) The farmer’s production possibilities frontier Panel (b) shows the combinations of meat and potatoes that the farmer can produce. Panel (c) shows the combinations of meat and potatoes that the rancher can produce. Both production possibilities frontiers are derived assuming that the farmer and rancher each work 8 hours per day. If there is no trade, each person’s production possibilities frontier is also his or her consumption possibilities frontier (c) The rancher’s production possibilities frontier Meat (oz) 0 4 8 Potatoes (oz) 16 32 A If there is no trade, the farmer
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This note was uploaded on 10/26/2010 for the course ECON 002 taught by Professor Eudey during the Spring '08 term at UPenn.

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Chapter 3 - Interdependence and the gains from trade -...

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