Interdependence and Trade But, this gives rise to two questions Why is interdependence the norm? What determines production and trade? Harcourt, Inc. items and derived items copyright C 2001 by Harcourt, Inc
Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Interdependence and Trade But, this gives rise to two questions: Why is interdependence the norm? What determines production and trade?
Why is interdependence the norm? Interdependence occurs because people are better off when they specialize and trade with others Harcourt, Inc. items and derived items copyright C 2001 by Harcourt, Inc
Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Why is interdependence the norm? Interdependence occurs because people are better off when they specialize and trade with others
What determines the pattern of production and trade? Patterns of production and trade are based upon differences in opportunity costs. Harcourt, Inc. items and derived items copyright C 2001 by Harcourt, Inc
Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. What determines the pattern of production and trade? Patterns of production and trade are based upon differences in opportunity costs
A Parable for the modern Economy Imagine only two goods: potatoes and meat only two people: a potato farmer and a cattle rancher What should each produce Why should they trade Harcourt, Inc. items and derived items copyright C 2001 by Harcourt, Inc
Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. Imagine . . . only two goods: potatoes and meat only two people: a potato farmer and a cattle rancher What should each produce? Why should they trade? A Parable for the Modern Economy
The Production Opportunities of the farmer and the rancher ours Needed to Make 1 lb of: Amount Produced in 40 Hours Meat Potatoes Meat Potatoes Farmer 20 hours/b 10 hours/b 2 bs 4 bs Rancher 1 hours/b 8 hours/b 40bs. 5 bs Harcourt, Inc. items and derived items copyright C 2001 by Harcourt, Inc
Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. The Production Opportunities of the Farmer and the Rancher Hours Needed to Make 1 lb. of: Amount Produced in 40 Hours Meat Potatoes Meat Potatoes Farmer 20 hours/lb 10 hours/lb 2 lbs. 4 lbs. Rancher 1 hours/lb 8 hours/lb. 40 lbs. 5 lbs