Interdependence and the Gains from Trade

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CHAPTER

3

Interdependence and the Gains from Trade

Microeconomics
N. Gregory Mankiw
Premium PowerPoint Slides by Ron Cronovich
© 2009 South-Western, a part of Cengage Learning, all rights reserved

PRINCIPLES OF

In this chapter, look for the answers to these questions:
Why do people – and nations – choose to be economically interdependent? How can trade make everyone better off? What is absolute advantage? What is comparative advantage? How are these concepts similar? How are they different?

1

Interdependence
Every day hair gel from you rely on Cleveland, OH many people cell phone from around from Taiwan the world, most of whom dress shirt you’ve never met, from China to provide you with the goods coffee from and services Kenya you enjoy.

Interdependence
One of the Ten Principles from Chapter 1: Trade can make everyone better off. We now learn why people – and nations – choose to be interdependent, and how they can gain from trade.

INTERDEPENDENCE AND THE GAINS FROM TRADE

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Our Example
Two countries: the U.S. and Japan Two goods: computers and wheat One resource: labor, measured in hours We will look at how much of both goods each country produces and consumes if the country chooses to be self-sufficient if it trades with the other country

INTERDEPENDENCE AND THE GAINS FROM TRADE

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Production Possibilities in the U.S.
The U.S. has 50,000 hours of labor available for production, per month. Producing one computer requires 100 hours of labor. Producing one ton of wheat requires 10 hours of labor.

INTERDEPENDENCE AND THE GAINS FROM TRADE

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Wheat (tons) 5,000 4,000 3,000 2,000 1,000 0

The U.S. PPF
The U.S. has enough labor to produce 500 computers, or 5000 tons of wheat, or any combination along the PPF.

Computers 100 200 300 400 500
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INTERDEPENDENCE AND THE GAINS FROM TRADE

Wheat (tons) 5,000 4,000 3,000 2,000 1,000 0

The U.S. Without Trade
Suppose the U.S. uses half its labor to produce each of the two goods. Then it will produce and consume 250 computers and 2500 tons of wheat.

Computers 100 200 300 400 500
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INTERDEPENDENCE AND THE GAINS FROM TRADE

ACTIVE LEARNING

1

Derive Japan’s PPF
Use the following information to draw Japan’s PPF. Japan has 30,000 hours of labor available for production, per month. Producing one computer requires 125 hours of labor. Producing one ton of wheat requires 25 hours of labor. Your graph should measure computers on the horizontal axis. 8

Japan’s PPF
Wheat (tons) 2,000

Japan has enough labor to produce 240 computers, or 1200 tons of wheat, or any combination along the PPF.

1,000

0

Computers 100 200 300
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INTERDEPENDENCE AND THE GAINS FROM TRADE

Japan Without Trade
Wheat (tons) 2,000

Suppose Japan uses half its labor to produce each good. Then it will produce and consume 120 computers and 600 tons of wheat.

1,000

0

Computers 100 200 300
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INTERDEPENDENCE AND THE GAINS FROM TRADE

Consumption With and Without Trade
Without trade, U.S. consumers get 250 computers and 2500 tons wheat. Japanese consumers get 120 computers and 600 tons wheat. We will compare consumption without trade to consumption with trade. First, we need to see how much of each good is produced and traded by the two countries.

INTERDEPENDENCE AND THE GAINS FROM TRADE

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ACTIVE LEARNING

2

Production under trade
1. Suppose the U.S. produces 3400 tons of wheat.

How many computers would the U.S. be able to produce with its remaining labor? Draw the point representing this combination of computers and wheat on the U.S. PPF. 2. Suppose Japan produces 240 computers.

How many tons of wheat would Japan be able to produce with its remaining labor? Draw this point on Japan’s PPF. 12

Wheat (tons) 5,000 4,000 3,000 2,000 1,000 0

U.S. Production With Trade
Producing 3400 tons of wheat requires 34,000 labor hours. The remaining 16,000 labor hours are used to produce...
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