Summarized from Greg Mankiw’s Principles of Economics PART 1 Introduction Chapter 3 of 36 – Interdependence and the Gains from Trade, section 4 (here resume Chapter 3, section 3 was posted March 15) Figure 1 here again Figure 2 here again The ranchers explanation of the gains from trade poses a puzzle • the farmer is worse at producing both meat and potatoes • if the rancher is better at both raising cattle and growing potatoes • how can the farmer specialize and be competitive producing either meat or potatoes? The answer comes from who can produce potatoes at a lower cost - the farmer or the rancher. One way to measure the cost of producing potatoes is to compare the inputs required by the two producers. We use the term “absolute advantage” when comparing the productivity of one person, firm, or nation to another. The producer requiring a smaller quantity of inputs to produce a good has an absolute advantage. In the figure 2 example • time is the only input • we determine absolute advantage • by looking at how much time potatoes and meat production takes The rancher • has an absolute advantage both in producing meat and potatoes • because she requires less time than the farmer to produce a unit of either Per Figure 1 • the rancher needs only 20 minutes to produce an ounce of meat, the farmer needs 60 minutes • the rancher needs only 10 minutes to produce an ounce of potatoes, the farmer needs 15 minutes The rancher • has lower cost, in terms of time, of producing both meat and potatoes • has an absolute advantage in producing both
Posted on: Sun, 23 Mar 2014 14:00:57 +0000
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