Learning Module 3 - Learning Module #3: Interdependence and...

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Learning Module #3: Interdependence and Gains from Trade Introduction Gilligan and Maryanne face trade-offs Gilligan and Maryanne are stranded on a deserted island. On this island, there are two sources of food, bananas and shrimp. Gilligan and Maryanne must decide how to allocate their time in the production of the each good. If the two castaway work independently, the amount of food they can consume a day is limited by their production. However, if each person specializes and produces the good in which they produce relatively well and then trade with the other, then the total production of both goods will increase. Once the castaways trade with each other, both will be able to consume more than they produce individually. The questions which must be answered. 1. What is the opportunity cost of producing each good for the castaways? 2. Which castaway is better at producing each good? 3. Which castaway can produce which good at a lower cost? 4. What will be the gains from trade that arise from specialization? The castaways must decide the best way to use their time
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Learning Module #3 – Interdependence and the Gains from Trade Learning Modules Objectives By the end of this module, students should understand: 1. how everyone can benefit when people trade with one another. 2. the meaning of absolute advantage and comparative advantage. 3. how comparative advantage explains the gains from trade. 4. how to apply the theory of comparative advantage to everyday life and national policy. Module 3.1 - A Parable for the Modern Economy Example For this example, there are only two people, Gilligan and Maryanne, who are stranded on a deserted island. There are only two goods: bananas and shrimp. Production Possibilities Suppose that the "work day" is 8 hours. Banana Production In 8 hours -- Maryanne can pick 50 bananas -- Gilligan can pick 40 bananas Shrimp Production In 8 hours -- Maryanne can catch 25 shrimp -- Gilligan can catch 10 shrimp For this example, we assume constant opportunity cost for each producer.
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Study the PowerPoint slide for two castaways producing only bananas and shrimp. Notice the shape of the production possibility frontiers. Module 3.2 - Comparative Advantage: The Driving Force of Specialization Comparative advantage and gains from trade Comparative advantage – the ability to produce a good at a lower opportunity cost than others could. Absolute advantage -- the ability to produce a good with fewer resources than other producers (i.e., better than other people). Study the PowerPoint slide for two castaways producing only bananas and shrimp. The absolute advantage shows who is better at producing a good. Maryanne has an absolute advantage in producing both goods.
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This note was uploaded on 03/01/2012 for the course ENC 101 taught by Professor Green during the Spring '12 term at University of Florida.

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Learning Module 3 - Learning Module #3: Interdependence and...

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