Chap_03 Interdependence and the Gains from Trade.pptVIP

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Chap_03 Interdependence and the Gains from Trade.ppt

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Chap_03 Interdependence and the Gains from Trade

* * 7 * 7 * 7 * 7 Harcourt, Inc. items and derived items copyright ? 2001 by Harcourt, Inc. David Ricardo and Trade In his 1816 book Principles of Political Economy and Taxation, David Ricardo developed the principle of comparative advantage as we know it today. Harcourt, Inc. items and derived items copyright ? 2001 by Harcourt, Inc. Should Tiger Woods Mow His Own Lawn? ? ? ? Harcourt, Inc. items and derived items copyright ? 2001 by Harcourt, Inc. Summary Interdependence and trade allow people to enjoy a greater quantity and variety of goods and services. Harcourt, Inc. items and derived items copyright ? 2001 by Harcourt, Inc. Summary 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. Harcourt, Inc. items and derived items copyright ? 2001 by Harcourt, Inc. Summary The gains from trade are based on comparative advantage, not absolute advantage. Comparative advantage applies to countries as well as to people. Harcourt, Inc. items and derived items copyright ? 2001 by Harcourt, Inc. Graphical Review Harcourt, Inc. items and derived items copyright ? 2001 by Harcourt, Inc. Production Possibilities Frontiers Potatoes (pounds) Meat (pounds) 4 2 1 2 (a) The Farmer’s Production Possibilities Frontier 0 A Harcourt, Inc. items and derived items copyright ? 2001 by Harcourt, Inc. Production Possibilities Frontiers Potatoes (pounds) Meat (pounds) 5 40 20 2.5 (b) The Rancher’s Production Possibilities Frontier 0 B Harcourt, Inc. items and derived items copyright ? 2001 by Harcourt, Inc. 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* Farmer’s consumption without trade Farmer’s consumption with trade Harcourt, Inc. items and derived items copyright ? 2001 by Harcourt, Inc. Trade Expands the Set of Consumption Possibilities Potatoes (pounds)