Chapter+Three

=**Interdependence and Gains from Trade** = 


 This chapter primarily deals with explaining a simple model of trade by using the concepts of **Comparative Advantage,** **Absolute Advantage** and how trade can usually benefit all participants. Even when one of the parties clearly has the upper hand in producing every product relevant to the trade. Like in this rather basic yet unorthodox example:

Sam Gold can punch with a "strength level" of 4 and kick with 9. Marshall Anderson on the other hand however can punch with a level of 12 and kick with 10.

Marshall Anderson is clearly stronger in both ways mentioned. Or rather he has the //**Absolute Advantage**//. How could a "trade" between these two parties benefit him at all? It seems that it would be more efficient for Marshall Anderson to do all the work.

Let's find out: media type="youtube" key="GJYo8F6EeLU&hl=en&fs=1" height="344" width="425"

Now let's take a step back. It seems kind of confusing and bewildering as how this could have anything to do with trade at all. But with some thought the answer becomes clear when combined with an understanding of a couple other concept: __**Opportunity Cost**__ Opportunity Cost is what a party gives up in order to obtain something. In this case Marshall Anderson gave up the time and opportunity to kick, by punching and Sam Gold gave up time and punching for kicking. Also, we need to note that while Sam Gold was weaker in both ways, his kick was stronger than his punch by a large margin, a margin of 5 to be exact. While Sam Gold on the other hand had a margin of 2 between his strikes. This margin of strength (or production in the economic sense) is the **Comparative Advantage** mentioned briefly above and explained in further detail in a moment.

Now let's combine all these things. By punching the assailant the two karate kids gave up the **opportunity cost** of kicking. Their total strength (production) equaled 16(Sam Golds 4 with Marshall Andersons 12). When they kicked together, the total production was 19 (Sam Golds 9 with Marshall Andersons 10). However when they __//**Specialized**//__ in their respective strengths, they struck the intruder with a total power of 21 (Sam Golds 9 with Marshall Andersons 12).

So by //Specializing//, they managed to obtain a total output higher than if they worked alone, or rather they chose to be __//**Interdependent**//__ as it gave them a higher output than if they isolated themselves from each other.

If this is still confusing, then let's use a slightly less juvenile example: Trade

Farmer A's production curve looks like this:

He can produce 50 Apples, 20 Oranges, or anything in between.

Farmer B's production curve on the other hand looks like this:

He can produce 50 Oranges, 20 Apples or anything in between.

So now for the magic, through specialization and trade, we can have both farmers consume more Apples and Oranges than are possible within their own individual production curves.

If Farmer A produces 50 Apples while Farmer B produces 50 Oranges, individually they may not be happy as they may want to other product. So if they __**//trade//**__, they can both benefit. If Farmer A were to trade 25 Apples for 25 Oranges, then **they would each have 25 Apples and 25 Oranges. //This level of production is outside the boundaries of their individual production curves.//**



So to recap: Both farmers specialized in what they did best and became interdependent with each other as they relied on the other as a source of the other fruit. This allowed them to consume at a level that either of them could not before specialization and trade.

For people addicted to WoW this video might help explain better:

media type="youtube" key="56igKC1U848&hl=en&fs=1" height="344" width="425" Source: http://kr.youtube.com/watch?v=56igKC1U848

And if all else fails, listen to Richard McKenzie, author of a textbook on economics:

media type="youtube" key="aLe_LF622JI&hl=en&fs=1" height="344" width="425" Source: http://kr.youtube.com/watch?v=aLe_LF622JI

__ Vocabulary __
Absolute advantage: the ability to produce a good using fewer inputs opportunity cost: things that must be given up to obtain something comparative advantage: the ability to produce a good at a lower opportunity cost than another producer imports: goods produced abroad and sold domestically exports: goods produced domestically and sold abroad.

__ Summary __
- It is good to trade with other countries because it allows greater variety and quantity of goods - there are two ways to compare ability to produce. One is absolute advantage and other is comparative advantage - in trade, people only care about comparative advantage, which deals with opportunity cost - Trade is good because each country can specialize in what it does the best.


1. fill in the blanks Countries export when and import when 2. Who should do the housework and why? Mom who need to talk to her friend on the phone, Dad who works for company, Charlie who goes to school, Baby Kellie

answers 1.    Countries export when _comparative advantage is higher_ and import when _comparative advantage is lower  2. Mom should do the housework since her opportunity cost is lower than everyone else in the family

//**Example of question**//

Source: http://images.google.co.kr/imgres?imgurl=http://www.econoclass.com/images/compadlarge.jpg&imgrefurl

What is wrong with this photo?

The man and the boy would probably get done more quickly if they switched chores. This isn't because the father can mow the lawn faster, since it's likely that he can mow AND sweep faster (i.e., he has an absolute advantage in both chores). They should switch since the boy likely has a comparative advantage in sweeping the driveway, while the man has one in mowing the lawn. 