Econ Notes: Chapter 3A Parable for the Modern Economy- Two goods: Meat and potatoes- Two people: rancher and farmers- If rancher produces only meato And farmer produces only potatoeso Both Gain from trade- If both rancher and farmer produce both meat and potatoeso THEY still gain from specialization and tradeSpecialization and Trade (See Chapter 3 in the book)- Farmers- Specialize in growing potatoeso More time growing potatoeso Less time rising cattle- Rancher- specialize in raising cattleo More time raising cattleo Less time growing potatoes- Tradeo .5oz of meat for 15oz of potatoes- Both gain from specialization and trade*if you are rational you will not trade if it leaves you worst off*farmer can produce beyond the frontier bc of specialization of trade*David Recardo –comparative advantage (foundation…Comparative Advantage - Absolute advantageo Produce using fewer inputs than another producer- Opportunity costo whatever must be given up to obtain some iteo Measures the trade off between the two good that each produce faces- Comparative Advantageo Produce a good lower cost than another produceo Reflects- relative opportunity cost- Principle of comparative advantageo Each good- produces by the individual that has the smaller opportunity cost of producing that goodOne person- Can have absolute advantage in both goods- Cannot have a comparative advantage in both good- For different opportunity costso One person- comparative in one goodo The other person- comparative advantage in other good. - Opportunity cost of one goodo Inverse of opportunity cost of the other- Gaines from specialization and tradeo Based on comparative advantageo Total production in economy rises Increase in the size of the economy pie Everyone- better of - Trade can benefit everyone in society o Allows people to specialize in activities Have a comparative advantage- The Price of Tradeo Must like between the two opportunity costs- Principle of comparative advantage explains”o Interdependenceo Gains from Trade- Should the Us Trade with countrieso Importso Exports- Principle of comparative advantageo Each good- produces by the country Smaller opportunity cost of producing that goods- Specialization and tradeo All countries- greater