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03-interdependence-131108090121-phpapp02.pptx
1.
Copyright © 2004
South-Western/Thomson Learning 3 Interdependence and the Gains from Trade It’s about how our economy coordinates the activities of millions of people with varying tastes and abilities.
2.
Consider your typical
day Copyright © 2004 South-Western • You wake up to an alarm clock made in Korea. • Then, you pour yourself orange juice made from Florida oranges and coffee from beans grown in Brazil. • Over breakfast, you watch a news program broadcast from New York on your television made in Japan. • Then, you put on some clothes made of cotton grown in Georgia and sewn in factories in Thailand. • You drive to class in a car made of parts manufactured in a half- dozen different countries. • Then, you arrived at your collage then start learning with Macroeconomics book by N. Gregory Mankiw which is published in United States of America.
3.
Do you realize? Copyright
© 2004 South-Western Every day you rely on many people from around the world, most of whom you don’t know to provide you with goods and services that you enjoy. Well, it is what we called as interdependence. Such interdependence is possible because people trade with one another.
4.
Interdependence andthe Gains from
Trade Copyright © 2004 South-Western • Remember, economics is the study of how societies produce and distribute goods in an attempt to satisfy the wants and needs of its members.
5.
Interdependence andthe Gains from
Trade • 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. Copyright © 2004 South-Western
6.
Interdependence andthe Gains from
Trade • Individuals and nations rely on specialized production and exchange as a way to address problems caused by scarcity. • But this gives rise to two questions: • Why is interdependence the norm? • What determines production and trade? Copyright © 2004 South-Western
7.
Interdependence andthe Gains from
Trade Copyright © 2004 South-Western • Why is interdependence the norm? • Interdependence occurs because people are better off when they specialize and trade with others. • What determines the pattern of production and trade? • Patterns of production and trade are based upon differences in opportunity costs.
8.
A PARABLE FOR
THE MODERN ECONOMY Copyright © 2004 South-Western • 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?
9.
Table 1 The
Production Opportunities of the Farmer and Rancher Copyright © 2004 South-Western
10.
Production Possibilities Copyright ©
2004 South-Western Self-Sufficiency means ignoring each other; • Each consumes what they each produce. • The production possibilities frontier is also the consumption possibilities frontier. • Without trade, economic gains are diminished.
11.
Figure 1 The
Production Possibilities Curve 4 16 8 32 Potatoes (ounces) A 0 Meat (ounces) (a) The Farmer’ s Production Possibilities Frontier If there is no trade, the farmer chooses this production and consumption. Copyright©2003 Southwestern/Thomson Learning
12.
Figure 1 The
Production Possibilities Curve Potatoes (ounces) 12 24 B 0 48 (b) The Rancher ’s Production Possibilities Frontier Meat (ounces) 24 If there is no trade, the rancher chooses this production and consumption. Copyright©2003 Southwestern/Thomson Learning
13.
The farmer should
produce potatoes. The rancher should produce meat. Copyright © 2004 South-Western Specialization 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.
14.
Table 2 The
Gains from Trade: A Summary Copyright © 2004 South-Western
15.
Figure 2 How
Trade Expands the Set of Consumption Opportunities Copyright©2003 Southwestern/Thomson Learning Potatoes (ounces) 16 5 4 17 8 32 A A* 0 Meat (ounces) Farmer's production and consumption without trade Farmer's consumption with trade Farmer's production with trade
16.
Figure 2 How
Trade Expands the Set of Consumption Opportunities Copyright © 2004 South-Western Potatoes (ounces) 12 13 24 27 B 0 Meat (ounces) 48 24 12 18 B* Rancher's consumption with trade Rancher's production with trade Rancher's production and consumption without trade
17.
Table 2 The
Gains from Trade: A Summary Copyright © 2004 South-Western
18.
Who can produce
potatoes at a lower cost--the farmer or the rancher? THE PRINCIPLE OF COMPARATIVE ADVANTAGE Copyright © 2004 South-Western • Differences in the costs of production determine the following: • Who should produce what? • How much should be traded for each product?
19.
THE PRINCIPLE OF COMPARATIVE
ADVANTAGE Copyright © 2004 South-Western • Differences in Costs of Production • Two ways to measure differences in costs of production: • The number of hours required to produce a unit of output (for example, one pound of potatoes). • The opportunity cost of sacrificing one good for another.
20.
Absolute Advantage Copyright ©
2004 South-Western • The comparison among producers of a good according to their productivity—absolute advantage • Describes the productivity of one person, firm, or nation compared to that of another. • The producer that requires a smaller quantity of inputs to produce a good is said to have an absolute advantage in producing that good.
21.
The Rancher has
an absolute advantage in the production of both meat and potatoes. Copyright © 2004 South-Western Absolute Advantage • The Rancher needs only 10 minutes to produce an ounce of potatoes, whereas the Farmer needs 15 minutes. • The Rancher needs only 20 minutes to produce an ounce of meat, whereas the Farmer needs 60 minutes.
22.
Opportunity Cost and
Comparative Advantage Copyright © 2004 South-Western • Compares producers of a good according to their opportunity cost. • Whatever must be given up to obtain some item • The producer who has the smaller opportunity cost of producing a good is said to have a comparative advantage in producing that good.
23.
Comparative Advantage and
Trade • Who has the absolute advantage? • The farmer or the rancher? • Who has the comparative advantage? • The farmer or the rancher? Copyright © 2004 South-Western
24.
Table 3 The
Opportunity Cost of Meat and Potatoes Copyright © 2004 South-Western Opportunity Cost of: Farmer 1 oz of Meat 4 ozpotatoes 1 oz of Potatoes 1/4 oz meat Rancher 2 ozpotatoes 1/2 oz meat
25.
Comparative Advantage and
Trade • The Rancher’s opportunity cost of an ounce of potatoes is ¼ an ounce of meat, whereas the Farmer’s opportunity cost of an ounce of potatoes is ½ an ounce of meat. • The Rancher’s opportunity cost of a pound of meat is only 4 ounces of potatoes, while the Farmer’s opportunity cost of an ounce of meat is only 2 ounces of potatoes... Copyright © 2004 South-Western
26.
…so, the Rancher
has a comparative advantage in the production of meat but the Farmer has a comparative advantage in the production of potatoes. Comparative Advantage and Trade Copyright © 2004 South-Western
27.
Comparative Advantage and
Trade • Comparative advantage and differences in opportunity costs are the basis for specialized production and trade. • Whenever potential trading parties have differences in opportunity costs, they can each benefit from trade. Copyright © 2004 South-Western
28.
Comparative Advantage and
Trade Copyright © 2004 South-Western • Benefits of Trade • Trade can benefit everyone in a society because it allows people to specialize in activities in which they have a comparative advantage.
29.
FYI—The Legacy of
Adam Smith and David Ricardo Copyright © 2004 South-Western • Adam Smith • In his 1776 book An Inquiry into the Nature and Causes of the Wealth of Nations, Adam Smith performed a detailed analysis of trade and economic interdependence, which economists still adhere to today. • David Ricardo • In his 1816 book Principles of Political Economy and Taxation, David Ricardo developed the principle of comparative advantage as we know it today.
30.
APPLICATIONS OF COMPARATIVE ADVANTAGE Copyright
© 2004 South-Western ? ? ? • Should Tiger Woods Mow His Own Lawn?
31.
APPLICATIONS OF COMPARATIVE ADVANTAGE Copyright
© 2004 South-Western • Should the United States Trade with Other Countries? • Each country has many citizens with different interests. International trade can make some individuals worse off, even as it makes the country as a whole better off. • Imports—goods produced abroad and sold domestically • Exports—goods produced domestically and sold abroad
32.
Summary Copyright © 2004
South-Western • Each person consumes goods and services produced by many other people both in our country and around the world. • Interdependence and trade are desirable because they allow everyone to enjoy a greater quantity and variety of goods and services.
33.
Summary Copyright © 2004
South-Western • There are two ways to compare the ability of two people producing a good. • The person who can produce a good with a smaller quantity of inputs has an absolute advantage. • The person with a smaller opportunity cost has a comparative advantage.
34.
Summary • The gains
from trade are based on comparative advantage, not absolute advantage. • Trade makes everyone better off because it allows people to specialize in those activities in which they have a comparative advantage. • The principle of comparative advantage applies to countries as well as people. Copyright © 2004 South-Western
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