Ch 3 - 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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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 chooses this production and
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Ch 3 - Chapter 3 Interdependence and the Gains from Trade

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