CHAPTER+3

Chapter 3 – Interdependence and the Gains ** TRADE **

Every day, you rely on many people from around the world, most of whom you do not know, to provide you with the goods and services that you enjoy. Such interdependence is possible because people trade with one another.

One of the Ten Principles of Economics highlighted in Chapter 1 is that trade can make everyone better off.  -  What exactly do people gain when they trade with one another?  -  Why do people choose to become interdependent? Two ways to compare the ability of two people or nations in producing a good.  -  absolute advantage: the ability to produce a good using fewer inputs than another producer  -  comparative advantage: the ability to produce a good at a lower opportunity cost than another producer *The gains from trade are based on comparative advantage, not absolute advantage.

  Fred: 1C = 3P Harry: 1C = 5P Fred can produce a coconut more cheaply than Harry can because the opportunity cost of one papaya is one third of a coconut for Fred, while the opportunity cost for one papaya is one fifth of a coconut for Harry. Every time Harry produces five papayas, he gives up one coconut. If Harry can give up less than five papayas for one coconut, Harry can be better off. If they agree to trade one coconut for four papayas, both can gain. * For both parties to gain from trade, the price at which they trade must lie between lie between the two opportunity costs. In this case, both parties gain from trade when the exchange ratio is anywhere between 1C=3p and 1C=5P.  -  opportunity cost: whatever must be given up to obtain some item Because the opportunity cost of one good is the inverse of the opportunity cost of the other, if a person’s opportunity cost of one good is relatively high, the opportunity cost of the other good must be relatively low. Trade makes everyone better off because it allows people to specialize in those activities in which they have a comparative advantage. 
 * || Coconut || Papaya ||
 * Fred || 50 || 150 ||
 * Harry || 5 || 25 ||

**Specialization & Trade** The proposed trade between Colorado and Washington offers each of them a combination of peaches and cherries that would be impossible in the absence of trade. In graph 1, Colorado gets to consume at point A. **Table 1 **   |||| **Colorado ** |||| **Washington ** || <span style="FONT-SIZE: 12pt; FONT-FAMILY: Arial; mso-font-kerning: 0pt; mso-fareast-font-family: 굴림">Peaches <span style="FONT-SIZE: 12pt; FONT-FAMILY: 굴림; mso-bidi-font-family: 굴림; mso-font-kerning: 0pt"> || <span style="FONT-SIZE: 12pt; FONT-FAMILY: Arial; mso-font-kerning: 0pt; mso-fareast-font-family: 굴림">Cherries <span style="FONT-SIZE: 12pt; FONT-FAMILY: 굴림; mso-bidi-font-family: 굴림; mso-font-kerning: 0pt"> || <span style="FONT-SIZE: 12pt; FONT-FAMILY: Arial; mso-font-kerning: 0pt; mso-fareast-font-family: 굴림">Peaches <span style="FONT-SIZE: 12pt; FONT-FAMILY: 굴림; mso-bidi-font-family: 굴림; mso-font-kerning: 0pt"> || <span style="FONT-SIZE: 12pt; FONT-FAMILY: Arial; mso-font-kerning: 0pt; mso-fareast-font-family: 굴림">Cherries <span style="FONT-SIZE: 12pt; FONT-FAMILY: 굴림; mso-bidi-font-family: 굴림; mso-font-kerning: 0pt"> || <span style="FONT-SIZE: 12pt; FONT-FAMILY: Arial; mso-font-kerning: 0pt; mso-fareast-font-family: 굴림">All Time Devoted to picking Peaches <span style="FONT-SIZE: 12pt; FONT-FAMILY: 굴림; mso-bidi-font-family: 굴림; mso-font-kerning: 0pt"> || <span style="FONT-SIZE: 12pt; FONT-FAMILY: Arial; mso-font-kerning: 0pt; mso-fareast-font-family: 굴림">20 tons <span style="FONT-SIZE: 12pt; FONT-FAMILY: 굴림; mso-bidi-font-family: 굴림; mso-font-kerning: 0pt"> || <span style="FONT-SIZE: 12pt; FONT-FAMILY: Arial; mso-font-kerning: 0pt; mso-fareast-font-family: 굴림">0 tons <span style="FONT-SIZE: 12pt; FONT-FAMILY: 굴림; mso-bidi-font-family: 굴림; mso-font-kerning: 0pt"> || <span style="FONT-SIZE: 12pt; FONT-FAMILY: Arial; mso-font-kerning: 0pt; mso-fareast-font-family: 굴림">30 tons <span style="FONT-SIZE: 12pt; FONT-FAMILY: 굴림; mso-bidi-font-family: 굴림; mso-font-kerning: 0pt"> || <span style="FONT-SIZE: 12pt; FONT-FAMILY: Arial; mso-font-kerning: 0pt; mso-fareast-font-family: 굴림">0 tons <span style="FONT-SIZE: 12pt; FONT-FAMILY: 굴림; mso-bidi-font-family: 굴림; mso-font-kerning: 0pt"> || <span style="FONT-SIZE: 12pt; FONT-FAMILY: Arial; mso-font-kerning: 0pt; mso-fareast-font-family: 굴림">All Time Devoted to picking Cherries <span style="FONT-SIZE: 12pt; FONT-FAMILY: 굴림; mso-bidi-font-family: 굴림; mso-font-kerning: 0pt"> || <span style="FONT-SIZE: 12pt; FONT-FAMILY: Arial; mso-font-kerning: 0pt; mso-fareast-font-family: 굴림">0 tons <span style="FONT-SIZE: 12pt; FONT-FAMILY: 굴림; mso-bidi-font-family: 굴림; mso-font-kerning: 0pt"> || <span style="FONT-SIZE: 12pt; FONT-FAMILY: Arial; mso-font-kerning: 0pt; mso-fareast-font-family: 굴림">20 tons <span style="FONT-SIZE: 12pt; FONT-FAMILY: 굴림; mso-bidi-font-family: 굴림; mso-font-kerning: 0pt"> || <span style="FONT-SIZE: 12pt; FONT-FAMILY: Arial; mso-font-kerning: 0pt; mso-fareast-font-family: 굴림">0 tons <span style="FONT-SIZE: 12pt; FONT-FAMILY: 굴림; mso-bidi-font-family: 굴림; mso-font-kerning: 0pt"> || <span style="FONT-SIZE: 12pt; FONT-FAMILY: Arial; mso-font-kerning: 0pt; mso-fareast-font-family: 굴림">60 tons <span style="FONT-SIZE: 12pt; FONT-FAMILY: 굴림; mso-bidi-font-family: 굴림; mso-font-kerning: 0pt"> || <span style="FONT-SIZE: 12pt; FONT-FAMILY: Arial; mso-font-kerning: 0pt; mso-fareast-font-family: 굴림"> **Table 2** <span style="FONT-SIZE: 12pt; FONT-FAMILY: 굴림; mso-bidi-font-family: 굴림; mso-font-kerning: 0pt"> <span style="FONT-SIZE: 12pt; FONT-FAMILY: Arial; mso-font-kerning: 0pt; mso-fareast-font-family: 굴림"> <span style="FONT-SIZE: 12pt; FONT-FAMILY: 굴림; mso-bidi-font-family: 굴림; mso-font-kerning: 0pt"> |||| **<span style="FONT-SIZE: 12pt; FONT-FAMILY: Arial; mso-font-kerning: 0pt; mso-fareast-font-family: 굴림">Colorado **<span style="FONT-SIZE: 12pt; FONT-FAMILY: 굴림; mso-bidi-font-family: 굴림; mso-font-kerning: 0pt"> |||| **<span style="FONT-SIZE: 12pt; FONT-FAMILY: Arial; mso-font-kerning: 0pt; mso-fareast-font-family: 굴림">Washington **<span style="FONT-SIZE: 12pt; FONT-FAMILY: 굴림; mso-bidi-font-family: 굴림; mso-font-kerning: 0pt"> || <span style="FONT-SIZE: 12pt; FONT-FAMILY: Arial; mso-font-kerning: 0pt; mso-fareast-font-family: 굴림"> <span style="FONT-SIZE: 12pt; FONT-FAMILY: 굴림; mso-bidi-font-family: 굴림; mso-font-kerning: 0pt"> || <span style="FONT-SIZE: 12pt; FONT-FAMILY: Arial; mso-font-kerning: 0pt; mso-fareast-font-family: 굴림">Peaches <span style="FONT-SIZE: 12pt; FONT-FAMILY: 굴림; mso-bidi-font-family: 굴림; mso-font-kerning: 0pt"> || <span style="FONT-SIZE: 12pt; FONT-FAMILY: Arial; mso-font-kerning: 0pt; mso-fareast-font-family: 굴림">Cherries <span style="FONT-SIZE: 12pt; FONT-FAMILY: 굴림; mso-bidi-font-family: 굴림; mso-font-kerning: 0pt"> || <span style="FONT-SIZE: 12pt; FONT-FAMILY: Arial; mso-font-kerning: 0pt; mso-fareast-font-family: 굴림">Peaches <span style="FONT-SIZE: 12pt; FONT-FAMILY: 굴림; mso-bidi-font-family: 굴림; mso-font-kerning: 0pt"> || <span style="FONT-SIZE: 12pt; FONT-FAMILY: Arial; mso-font-kerning: 0pt; mso-fareast-font-family: 굴림">Cherries <span style="FONT-SIZE: 12pt; FONT-FAMILY: 굴림; mso-bidi-font-family: 굴림; mso-font-kerning: 0pt"> || <span style="FONT-SIZE: 12pt; FONT-FAMILY: Arial; mso-font-kerning: 0pt; mso-fareast-font-family: 굴림">Production and consumption w/ autarky <span style="FONT-SIZE: 12pt; FONT-FAMILY: 굴림; mso-bidi-font-family: 굴림; mso-font-kerning: 0pt"> || <span style="FONT-SIZE: 12pt; FONT-FAMILY: Arial; mso-font-kerning: 0pt; mso-fareast-font-family: 굴림">8 <span style="FONT-SIZE: 12pt; FONT-FAMILY: 굴림; mso-bidi-font-family: 굴림; mso-font-kerning: 0pt"> || <span style="FONT-SIZE: 12pt; FONT-FAMILY: Arial; mso-font-kerning: 0pt; mso-fareast-font-family: 굴림">12 <span style="FONT-SIZE: 12pt; FONT-FAMILY: 굴림; mso-bidi-font-family: 굴림; mso-font-kerning: 0pt"> || <span style="FONT-SIZE: 12pt; FONT-FAMILY: Arial; mso-font-kerning: 0pt; mso-fareast-font-family: 굴림">9 <span style="FONT-SIZE: 12pt; FONT-FAMILY: 굴림; mso-bidi-font-family: 굴림; mso-font-kerning: 0pt"> || <span style="FONT-SIZE: 12pt; FONT-FAMILY: Arial; mso-font-kerning: 0pt; mso-fareast-font-family: 굴림">42 <span style="FONT-SIZE: 12pt; FONT-FAMILY: 굴림; mso-bidi-font-family: 굴림; mso-font-kerning: 0pt"> || <span style="FONT-SIZE: 12pt; FONT-FAMILY: Arial; mso-font-kerning: 0pt; mso-fareast-font-family: 굴림">Production w/ trade <span style="FONT-SIZE: 12pt; FONT-FAMILY: 굴림; mso-bidi-font-family: 굴림; mso-font-kerning: 0pt"> || <span style="FONT-SIZE: 12pt; FONT-FAMILY: Arial; mso-font-kerning: 0pt; mso-fareast-font-family: 굴림">20 <span style="FONT-SIZE: 12pt; FONT-FAMILY: 굴림; mso-bidi-font-family: 굴림; mso-font-kerning: 0pt"> || <span style="FONT-SIZE: 12pt; FONT-FAMILY: Arial; mso-font-kerning: 0pt; mso-fareast-font-family: 굴림">0 <span style="FONT-SIZE: 12pt; FONT-FAMILY: 굴림; mso-bidi-font-family: 굴림; mso-font-kerning: 0pt"> || <span style="FONT-SIZE: 12pt; FONT-FAMILY: Arial; mso-font-kerning: 0pt; mso-fareast-font-family: 굴림">0 <span style="FONT-SIZE: 12pt; FONT-FAMILY: 굴림; mso-bidi-font-family: 굴림; mso-font-kerning: 0pt"> || <span style="FONT-SIZE: 12pt; FONT-FAMILY: Arial; mso-font-kerning: 0pt; mso-fareast-font-family: 굴림">60 <span style="FONT-SIZE: 12pt; FONT-FAMILY: 굴림; mso-bidi-font-family: 굴림; mso-font-kerning: 0pt"> || <span style="FONT-SIZE: 12pt; FONT-FAMILY: Arial; mso-font-kerning: 0pt; mso-fareast-font-family: 굴림">Consumption w/ trade <span style="FONT-SIZE: 12pt; FONT-FAMILY: 굴림; mso-bidi-font-family: 굴림; mso-font-kerning: 0pt"> || <span style="FONT-SIZE: 12pt; FONT-FAMILY: Arial; mso-font-kerning: 0pt; mso-fareast-font-family: 굴림">10 <span style="FONT-SIZE: 12pt; FONT-FAMILY: 굴림; mso-bidi-font-family: 굴림; mso-font-kerning: 0pt"> || <span style="FONT-SIZE: 12pt; FONT-FAMILY: Arial; mso-font-kerning: 0pt; mso-fareast-font-family: 굴림">15 <span style="FONT-SIZE: 12pt; FONT-FAMILY: 굴림; mso-bidi-font-family: 굴림; mso-font-kerning: 0pt"> || <span style="FONT-SIZE: 12pt; FONT-FAMILY: Arial; mso-font-kerning: 0pt; mso-fareast-font-family: 굴림">10 <span style="FONT-SIZE: 12pt; FONT-FAMILY: 굴림; mso-bidi-font-family: 굴림; mso-font-kerning: 0pt"> || <span style="FONT-SIZE: 12pt; FONT-FAMILY: Arial; mso-font-kerning: 0pt; mso-fareast-font-family: 굴림">45 <span style="FONT-SIZE: 12pt; FONT-FAMILY: 굴림; mso-bidi-font-family: 굴림; mso-font-kerning: 0pt"> || <span style="FONT-SIZE: 12pt; FONT-FAMILY: Arial; mso-font-kerning: 0pt; mso-fareast-font-family: 굴림">Gains from Trade <span style="FONT-SIZE: 12pt; FONT-FAMILY: 굴림; mso-bidi-font-family: 굴림; mso-font-kerning: 0pt"> || <span style="FONT-SIZE: 12pt; FONT-FAMILY: Arial; mso-font-kerning: 0pt; mso-fareast-font-family: 굴림">2 <span style="FONT-SIZE: 12pt; FONT-FAMILY: 굴림; mso-bidi-font-family: 굴림; mso-font-kerning: 0pt"> || <span style="FONT-SIZE: 12pt; FONT-FAMILY: Arial; mso-font-kerning: 0pt; mso-fareast-font-family: 굴림">3 <span style="FONT-SIZE: 12pt; FONT-FAMILY: 굴림; mso-bidi-font-family: 굴림; mso-font-kerning: 0pt"> || <span style="FONT-SIZE: 12pt; FONT-FAMILY: Arial; mso-font-kerning: 0pt; mso-fareast-font-family: 굴림">1 <span style="FONT-SIZE: 12pt; FONT-FAMILY: 굴림; mso-bidi-font-family: 굴림; mso-font-kerning: 0pt"> || <span style="FONT-SIZE: 12pt; FONT-FAMILY: Arial; mso-font-kerning: 0pt; mso-fareast-font-family: 굴림">3 <span style="FONT-SIZE: 12pt; FONT-FAMILY: 굴림; mso-bidi-font-family: 굴림; mso-font-kerning: 0pt"> || **<span style="FONT-SIZE: 12pt; FONT-FAMILY: Arial; mso-font-kerning: 0pt; mso-fareast-font-family: 굴림">Graph 1 **<span style="FONT-SIZE: 12pt; FONT-FAMILY: 굴림; mso-bidi-font-family: 굴림; mso-font-kerning: 0pt"> **<span style="FONT-SIZE: 12pt; FONT-FAMILY: Arial; mso-font-kerning: 0pt; mso-fareast-font-family: 굴림">Graph 2 **<span style="FONT-SIZE: 12pt; FONT-FAMILY: 굴림; mso-bidi-font-family: 굴림; mso-font-kerning: 0pt"> <Quiz/ Solution>

<span style="FONT-FAMILY: 바탕"> The diagram shows the production possibility frontier for two countries each producing two goods, Y and S. From the diagrams we can conclude that <span style="FONT-FAMILY: 'Comic Sans MS'; mso-bidi-font-size: 10.0pt; mso-bidi-font-family: 'Comic Sans MS'; mso-fareast-font-family: 'Comic Sans MS'"> A.  The opportunity cost ratios for both countries are the same and thus there are no potential gains from trade <span style="FONT-FAMILY: 'Comic Sans MS'; mso-bidi-font-size: 10.0pt; mso-bidi-font-family: 'Comic Sans MS'; mso-fareast-font-family: 'Comic Sans MS'"> B.  France has an absolute advantage in producing both good Y and S <span style="FONT-FAMILY: 'Comic Sans MS'; mso-bidi-font-size: 10.0pt; mso-bidi-font-family: 'Comic Sans MS'; mso-fareast-font-family: 'Comic Sans MS'"> C.   Germany has a comparative advantage in Good S <span style="FONT-FAMILY: 'Comic Sans MS'; mso-bidi-font-size: 10.0pt; mso-bidi-font-family: 'Comic Sans MS'; mso-fareast-font-family: 'Comic Sans MS'"> D.   Germany has a comparative advantage in Good Y  Answer: A