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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We Show in this Chapter: Gains from specialization and trade Based on comparative advantage Total production in economy rises Increase in the size of the economic pie Everyone – better off
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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 3
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Figure The production possibilities frontier (a) 1 4 (a) Production Opportunities Amount produced in 8 hours Meat Potatoe s Farmer Rancher 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 5 (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
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This note was uploaded on 08/31/2011 for the course ECE 12512 taught by Professor Johnation during the Fall '10 term at IUPUC.

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

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