Chapter+3+(JEM)+-+Interdependence+and+the+Gains+From+Trade

//Think about your typical day://
 * You wake up by an alarm clock in Japan
 * Then you eat breakfast (drink cranberry juice from New England, eat potatoes from Idaho)
 * Then you brush your teeth by using toothbrush made in China and toothpaste made in Mexico
 * Then you put on clothes made in Italy

These products, as you can see, are from all around various places on the world, but you do not know the actual person who had made these products. However, interdependence is possible because **PEOPLE TRADE ONE ANOTHER.**


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

Know we are going to take a look at:

1)..... Why trade?

- People "specialize" in one area and when they trade it's better off!

2)..... What determines trade?

- It is based on difference in opportunity costs!

Lets take a look at an example:

__//Barry is capable of making 50 computers in an hour but 1 game in an hour.//__ __//Stewart is capable of making 1 computer in an hour but 50 games in an hour.//__

Now... When both of them "specialize" on each areas... (Barry with computers) (Stewart with games) they can trade each other and get benefit.

However when you look at the data above, the capability of making products for Barry and Stewart are different. Why is that? - This is the time when the term **Absolute and Comparative advantage** comes in.


 * Absolute advantage:** produce more using fewer inputs than another producer
 * Comparative advantage:** produce more at a lower "opportunity costs" than another producer

Lets say if A can produce 100 chickens in an hour and B can produce only 10 chickens in an hour, then we say **"A has a Absolute advantage in producing Chickens".** However, lets say if A can produce 50 oz of beer in an hour and B also can produce 50 oz of beer in an hour, then we say **"B has a Comparative advantage in producing beer".** Because it costs "less" for B to make 50 oz of beer (10 chickens). For A, it costs him 100 chickens.

__**Questions and Answers**__

Both Japan and Korea workers can produce 10 computers a year. Korean farmer can produce 10 tons of wheat a year and Japanese farmer can only produce 5 tons of wheat. a)  Which country has an absolute advantage in producing computers and wheat?  b)    Which country has a comparative advantage in producing computers and wheat?  c)   What can be their trading ratio?

Answers a)  Korea has absolute advantage in producing wheat. Both countries have has absolute advantage in producing computers.  b)    Japan has comparative advantage in computers because it cost them less wheat when producing computers. Korea has comparative advantage in wheat.  c)   For a computer that Japan give to Korea , Korea gives 3/4 ton of wheat.