The document discusses the concept of interdependence and gains from trade. It explains that specialization and trade occur because people are better off specializing in what they are relatively efficient at producing and trading with others. While one party may have an absolute advantage in producing both goods, comparative advantage, based on opportunity costs, determines who has a relative advantage and therefore who benefits most from specializing in each good. This allows for gains from both parties through voluntary trade.

1. 3 Interdependence and the Gains from Trade

9. Table 1 The Production Opportunities of the Farmer and Rancher Copyright © 2004 South-Western

11. Figure 1 The Production Possibilities Curve Potatoes (ounces) 0 Meat (ounces) (a) The Farmer ’ s Production Possibilities Frontier Copyright©2003 Southwestern/Thomson Learning 4 16 8 32 A If there is no trade, the farmer chooses this production and consumption.

12. Figure 1 The Production Possibilities Curve Copyright©2003 Southwestern/Thomson Learning Potatoes (ounces) 0 Meat (ounces) (b) The Rancher ’ s Production Possibilities Frontier 12 24 B 48 24 If there is no trade, the rancher chooses this production and consumption.

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) 0 Meat (ounces) (a) The Farmer ’ s Production and Consumption 4 16 5 17 8 32 A A* 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) 0 Meat (ounces) (b) The Rancher ’ s Production and Consumption 12 24 13 27 B 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

24. Table 3 The Opportunity Cost of Meat and Potatoes

26. Comparative Advantage and Trade … so, the Rancher has a comparative advantage in the production of meat but the Farmer has a comparative advantage in the production of potatoes.