Professional Documents
Culture Documents
Rashwan
Principles of
Economics Arab League Edition
Chapter 3
Interdependence and the
Gains from Trade
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classroom use.
In this chapter,
look for the answers to these questions:
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classroom use.
Interdependence
Every day cell phone
from Taiwan
you rely on
many people
from around
Cotton shirt
the world, from China
most of whom
you’ve never met,
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.
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classroom use.
Our Example
Two countries: Saudi Arabia 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
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Production Possibilities in Saudi Arabia
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classroom use.
Saudi Arabia PPF
Wheat
(tons) Saudi Arabia has enough
5,000 labor to produce 500
computers, or 5000 tons of
4,000 wheat, or any combination
along the PPF.
3,000
2,000
1,000
Computers
0
100 200 300 400 500
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Saudi Arabia Without Trade
Wheat
(tons)
Suppose the Saudi Arabia uses half
5,000
its labor to produce each of the
4,000 two goods.
Then it will produce and consume
3,000
250 computers and
2,000
2500 tons of wheat.
1,000
Computers
0
100 200 300 400 500
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
ACTIVE LEARNING 1
Derive Japan’s PPF
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© 2012 Cengage
use as permitted Learning.
in a license All Rights
distributed with aReserved. May not
certain product orbe copied,
service or scanned,
otherwiseoronduplicated, in whole or in
a password-protected part, except
website for for use as
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permitted
classroom use. in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Japan’s PPF
Wheat
(tons)
Japan has enough labor to
produce 240 computers,
2,000 or 1200 tons of wheat,
or any combination
along the PPF.
1,000
0 Computers
100 200 300
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Japan Without Trade
Wheat
(tons) Suppose Japan uses half its labor to
produce each good.
2,000 Then it will produce and consume
120 computers and
600 tons of wheat.
1,000
0 Computers
100 200 300
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Consumption With and Without Trade
Without trade,
Saudi Arabian 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.
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classroom use.
ACTIVE LEARNING 2
Production under trade
1,000
Computers
0
100 200 300 400 500
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Japan’s Production With Trade
1,000
0 Computers
100 200 300
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Exports & Imports
Exports:
goods produced domestically and sold abroad
To export means to sell domestically produced
goods abroad.
Imports:
goods produced abroad and sold domestically
To import means to purchase goods produced
in other countries.
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classroom use.
ACTIVE LEARNING 3
Consumption under trade
1,000
Computers
0
100 200 300 400 500
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Japan’s Consumption With Trade
computers wheat
Wheat produced 240 0
(tons)
+ imported 0 700
2,000 – exported 110 0
= amount
130 700
consumed
1,000
0 Computers
100 200 300
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Trade Makes Both Countries Better Off
Saudi Arabia
consumption consumption gains from
without trade with trade trade
computers 250 270 20
wheat 2500 2700 200
Japan
consumption consumption gains from
without trade with trade trade
computers 120 130 10
wheat 600 700 100
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Where Do These Gains Come From?
Absolute advantage: the ability to produce a
good using fewer inputs than another producer
Saudi Arabia has an absolute advantage in
wheat: producing a ton of wheat uses 10 labor
hours in Saudi Arabia vs. 25 in Japan.
If each country has an absolute advantage
in one good and specializes in that good,
then both countries can gain from trade.
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classroom use.
Where Do These Gains Come From?
Which country has an absolute advantage in
computers?
Producing one computer requires
125 labor hours in Japan,
but only 100 in Saudi Arabia.
Saudi Arabia has an absolute advantage in both
goods!
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classroom use.
Opportunity Cost and
Comparative Advantage
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classroom use.
Opportunity Cost and
Comparative Advantage