Interdependence

1
Chapter 3

• Interdependence
• and
• The Gains From Trade

2
Ch 3 Outline

• 1) Definitions Absolute Comparative Advantage
• 2) How we can benefit by specializing

3

• Why interdependence?
• Who Trades What?

4
Absolute Advantage

• Produces a Good Using Fewer Resources

5
Comparative Advantage

• Produces a Good at a Lower Opportunity Cost

6
TWO FARMERSKELLI LUKAS

• Two Crops WHEAT and RYE
• Same Resource Endowments

7
Self-Sufficiency
6
Kelli
Lukas
PPF
PPF
8
Rye
Rye
2
8
Wheat
Wheat
8
Questions?

• Who has Absolute Advantage in
• Wheat?
• Rye?
• Who has Comparative Advantage in
• Wheat?
• Rye?

9
Self-Sufficiency
6
Kelli
Lukas
1W1R
Comp Adv Wheat
1W3R
8
1R1W
1R1/3W
Comp Adv Rye
7
3
Rye
Rye
1
2
1
8
Wheat
Wheat
10
Scene I No Trade

• Kelli at White Star
• Lukas at White Star

Now Remember That!
11
Self-Sufficiency
6
Kelli
Lukas
PPF
PPF
8
3
4
R
R
4
1
2
8
W
W
12
TableSummary Person
No Trade Spec Trd Consume

• Kelli 4W 4R
• Lukas 1W
  3R

13
Self-Sufficiency
6
Kelli
Lukas
8
3
4
R
R
4
1
2
8
W
W
14
Scene II Each Specializes...
6
Kelli
Lukas
8
3
4
3
R
R
4
1
5
2
8
0
W
W
15
TableSummary Person
No Trade Spec TrdConsume

• Kelli 4W 5W 4R 3R
• Lukas 1W 0W
  3R 6R

16
What Price Do They Trade At?

• Kelli 1W 1R
• Lukas 1W 3R
• EXCHANGE RATE 1W 2R

17
Scene III Trade and Consume
18
Trade Consume
6
Kelli
Lukas
8
4
5
3
4
3
R
R
4
1
5
0
2
8
W
W
19
TableSummary Person
No Trade SpecTrd Consume

• Kelli 4W 5W -1W 4W
• 4R 3R 2R 5R
• Lukas 1W 0W 1W 1W
  3R 6R
  -2R 4R

20
Hard Part is Done !!!

• AMEN

21
Principle of Comparative Advantage

• All can benefit when specialize trade according
  to Comparative Advantage!.

22
Why Doesnt Michael Jordan Mow His Own Lawn?
Wrong Sport!
23
Who hasAbsolute Adv in F?C? Comp Adv in F?C?
Food
Food
U.S.
Japan
4
2
2
2
Cars
Cars
24
Good Bye
To Summer!