C
'onsider your typical day. You wake up in the morning and
pour yourself juice from oranges grown in Florida and
coffee from beans grown in Brazil. Over breakfast, you
read a newspaper written in New York on a tablet made in China.
You get dressed in clothes made of cotton grown in Georgia and
sewn in factories in Thailand. You drive to class in a car made
of parts manufactured in more than a dozen countries around
the world. Then you open up your economics textbook written
by an author living in Massachusetts, published by a company
located in Ohio, and printed on paper made from trees grown
Interdependence
in Oregon.
Every day, you rely on many people, most of whom you have
never met, to provide you with the goods and services that you
and the Gains
enjoy. Such interdependence is possible because people trade
vyitl;i, one another. Those people providing you with goods and from Trade
se ·ces are not acting out of generosity. Nor is some government
, 46 PART I INTRODUCTION
agency directing them to satisfy your desires. Instead, people provide you and
other consumers with the goods and services they produce because they get some-
thing in return.
In subsequent chapters, we examine how an economy coordinates the activities
of millions of people with varying tastes and abilities. As a starting point for this
analysis, this chapter considers the reasons for economic interdependence. One
of the Ten Principles of Economics in Chapter 1 is that trade can make everyone
better off. We now examine this principle more closely. What exactly do peo-
ple gain when they trade with one another? Why do people choose to become
interdependent?
The answers to these questions are key to understanding the modern global
economy. Most countries today import from abroad many of the goods and ser-
vices they consume, and they export to foreign customers many of the goods and
services they produce. The analysis in this chapter explains interdependence not
only among individuals but also among nations. As we will see, the gains from
trade are much the same whether you are buying a haircut from your local barber
or a T-shirt made by a worker on the other side of the globe.
3- A Parable for the Modem Economy
To understand why people choose to depend on others for goods and services and
how this choice improves their lives, let's examine a simple economy. Imagine that
there are only two goods in the world: meat and potatoes. And there are only two
people: a cattle rancher named Ruby and a potato farmer named Frank. Both Ruby
and Frank would like to eat a diet of both meat and potatoes.
The gains from trade are clearest if Ruby can produce only meat and Frank can
produce only potatoes. In one scenario, Frank and Ruby could choose to have noth-
ing to do with each other. But after several months of eating beef roasted, broiled,
seared, and grilled, Ruby might decide that self-sufficiency is not all it's cracked
up to be. Frank, who has been eating potatoes mashed, fried, baked, and scalloped,
would likely agree. It is easy to see that trade would allow both of them to enjoy
greater variety: Each could then have a steak with a baked potato or a burger with
fries.
Although this scene shows most simply how everyone can benefit from trade,
the gains would be similar if Frank and Ruby were each capable of producing
the other good, but only at great cost. Suppose, for example, that Ruby can grow
potatoes but her land is not very well suited for it. Similarly, suppose that Frank
can raise cattle and produce meat but is not very good at it. In this case, Frank and
Ruby each benefit by specializing in what he or she does best and then trading
with the other person.
The gains from trade are less obvious, however, when one person is better at
producing every good. For example, suppose that Ruby is better at raising cat-
tle and better at growing potatoes than Frank. In this case, should Ruby remain
self-sufficient? Or is there still reason for her to trade with Frank? To answer this
question, let's look more closely at the factors that affect such a decision.
3- la Production Possibilities
Suppose that Frank and Ruby each work 8 hours per day and can devote this
time to growing potatoes, raising cattle, or a combination of the two. The table in
Figure 1 shows the amount of time each person requires to produce 1 ounce of each
'onsider your typical day. You wake up in the morning and
pour yourself juice from oranges grown in Florida and
coffee from beans grown in Brazil. Over breakfast, you
read a newspaper written in New York on a tablet made in China.
You get dressed in clothes made of cotton grown in Georgia and
sewn in factories in Thailand. You drive to class in a car made
of parts manufactured in more than a dozen countries around
the world. Then you open up your economics textbook written
by an author living in Massachusetts, published by a company
located in Ohio, and printed on paper made from trees grown
Interdependence
in Oregon.
Every day, you rely on many people, most of whom you have
never met, to provide you with the goods and services that you
and the Gains
enjoy. Such interdependence is possible because people trade
vyitl;i, one another. Those people providing you with goods and from Trade
se ·ces are not acting out of generosity. Nor is some government
, 46 PART I INTRODUCTION
agency directing them to satisfy your desires. Instead, people provide you and
other consumers with the goods and services they produce because they get some-
thing in return.
In subsequent chapters, we examine how an economy coordinates the activities
of millions of people with varying tastes and abilities. As a starting point for this
analysis, this chapter considers the reasons for economic interdependence. One
of the Ten Principles of Economics in Chapter 1 is that trade can make everyone
better off. We now examine this principle more closely. What exactly do peo-
ple gain when they trade with one another? Why do people choose to become
interdependent?
The answers to these questions are key to understanding the modern global
economy. Most countries today import from abroad many of the goods and ser-
vices they consume, and they export to foreign customers many of the goods and
services they produce. The analysis in this chapter explains interdependence not
only among individuals but also among nations. As we will see, the gains from
trade are much the same whether you are buying a haircut from your local barber
or a T-shirt made by a worker on the other side of the globe.
3- A Parable for the Modem Economy
To understand why people choose to depend on others for goods and services and
how this choice improves their lives, let's examine a simple economy. Imagine that
there are only two goods in the world: meat and potatoes. And there are only two
people: a cattle rancher named Ruby and a potato farmer named Frank. Both Ruby
and Frank would like to eat a diet of both meat and potatoes.
The gains from trade are clearest if Ruby can produce only meat and Frank can
produce only potatoes. In one scenario, Frank and Ruby could choose to have noth-
ing to do with each other. But after several months of eating beef roasted, broiled,
seared, and grilled, Ruby might decide that self-sufficiency is not all it's cracked
up to be. Frank, who has been eating potatoes mashed, fried, baked, and scalloped,
would likely agree. It is easy to see that trade would allow both of them to enjoy
greater variety: Each could then have a steak with a baked potato or a burger with
fries.
Although this scene shows most simply how everyone can benefit from trade,
the gains would be similar if Frank and Ruby were each capable of producing
the other good, but only at great cost. Suppose, for example, that Ruby can grow
potatoes but her land is not very well suited for it. Similarly, suppose that Frank
can raise cattle and produce meat but is not very good at it. In this case, Frank and
Ruby each benefit by specializing in what he or she does best and then trading
with the other person.
The gains from trade are less obvious, however, when one person is better at
producing every good. For example, suppose that Ruby is better at raising cat-
tle and better at growing potatoes than Frank. In this case, should Ruby remain
self-sufficient? Or is there still reason for her to trade with Frank? To answer this
question, let's look more closely at the factors that affect such a decision.
3- la Production Possibilities
Suppose that Frank and Ruby each work 8 hours per day and can devote this
time to growing potatoes, raising cattle, or a combination of the two. The table in
Figure 1 shows the amount of time each person requires to produce 1 ounce of each
