Economics-1

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Interdependence and the Gains from Trade : 

Interdependence and the Gains from Trade Chapter 3

Interdependence and Trade : 

Interdependence and Trade Remember, economics is the study of how societies produce and distribute goods in an attempt to satisfy the wants and needs of its members.

How do we satisfy our wants and needs in a global economy? : 

How do we satisfy our wants and needs in a global economy? We can be economically self-sufficient. We can specialize and trade with others, leading to economic interdependence (I.e. Globalization)

A Parable for the Modern Economy : 

Imagine . . . only two goods: potatoes and meat only two people: a potato farmer and a cattle rancher What should each produce? Why should they trade? A Parable for the Modern Economy

The Production Opportunities of the Farmer and the Rancher : 

The Production Opportunities of the Farmer and the Rancher

Production Possibilities Frontiers : 

Production Possibilities Frontiers Potatoes (pounds) Meat (pounds) 4 2 (a) The Farmer’s Production Possibilities Frontier 0

Production Possibilities Frontiers : 

Production Possibilities Frontiers Potatoes (pounds) Meat (pounds) 5 40 (b) The Rancher’s Production Possibilities Frontier 0

The Gains from Trade: A Summary : 

The Gains from Trade: A Summary

The Gains from Trade: A Summary : 

The Gains from Trade: A Summary

Trade Expands the Set of Consumption Possibilities : 

Trade Expands the Set of Consumption Possibilities Potatoes (pounds) Meat (pounds) 4 2 2 1 (a) How Trade Increases the Farmer’s Consumption 0 A 3 3 A*

Trade Expands the Set of Consumption Possibilities : 

Trade Expands the Set of Consumption Possibilities Potatoes (pounds) Meat (pounds) 5 2.5 40 20 (b) How Trade Increases The Rancher’s Consumption 0 B 21 3 B*

The Gains from Trade: A Summary : 

The Gains from Trade: A Summary

The Farmer and the Rancher Specialize and Trade : 

The Farmer and the Rancher Specialize and Trade Each would be better off if they specialized in producing the product they are more suited to produce, and then trade with each other. The farmer should produce potatoes. The rancher should produce meat.

The Principle of Comparative Advantage : 

The Principle of Comparative Advantage Who should produce what? How much should be traded for each product? Who can produce potatoes at a lower cost--the farmer or the rancher? Differences in the costs of production determine the following:

Absolute Advantage : 

Absolute Advantage Describes the productivity of one person, firm, or nation compared to that of another. Absolute advantage can be measured in two ways: Least number of hours to produce a good. Most number of goods produced in a given amount of time.

Comparative Advantage : 

Comparative Advantage Compares producers of a good according to their opportunity cost. The producer who has the smaller opportunity cost of producing a good is said to have a comparative advantage in producing that good.

The Opportunity Cost of Meat and Potatoes : 

The Opportunity Cost of Meat and Potatoes 8 pounds of meat 1/8 pounds of potatoes Rancher 1/2 pound of meat 2 pounds of potatoes Farmer 1 pound of potatoes 1 pound of meat

Should Tiger Woods Mow His Own Lawn? : 

Should Tiger Woods Mow His Own Lawn? ? ? ?

What are the pros and cons of Globalization? : 

What are the pros and cons of Globalization? Globalization means that free trade is spread to all corners of the world with no hindrances. Globalization Video