Chapter 3

PowerPoint Presentations for
Principles of Microeconomics
Ninth Canadian Edition
by Mankiw/Kneebone/McKenzie
Adapted for the

Ninth Canadian Edition by
Marc Prud’Homme
University of Ottawa
Copyright © 2024 Cengage Learning Ltd. 3-1

INTERDEPENDENCE
AND THE GAINS
FROM TRADE
Chapter 3

INTERDEPENDENCE
AND THE GAINS FROM TRADE
▪ One of the ten principles of economics highlighted in Chapter 1
is that trade can make everyone better off.
▪ This principle explains why people trade with their neighbours and
why nations trade with other nations.
▪ What exactly do people gain when they trade with one another?
▪ Why do people choose to become interdependent?
3 Copyright © 2024 Cengage Learning Ltd. 3-3

A PARABLE FOR THE MODERN ECONOMY
▪ Imagine that in the world there are:

1. Two goods
▪ Meat and potatoes
2. Two people
▪ Cattle Rancher (Ruby) and Potato Farmer (Frank)
▪ Each would like to eat both meat and potatoes.
▪ Trade leads to greater variety.

▪ Frank can raise cattle and produce meat, but he is not very good at
it.
▪ Ruby can grow potatoes, but her land is not very well suited for it.
▪ Frank and Ruby can each benefit by specializing in what they do
best and then trade with the other.
▪ The gains from trade are less obvious, however, when one person
is better at producing every good.
3-1 Copyright © 2024 Cengage Learning Ltd. 3-5

PRODUCTION POSSIBILITIES
▪ PRODUCTION POSSIBILITIES FRONTIER shows the various
mixes of output that an economy can produce.
▪ It illustrates one of the ten principles of economics in
Chapter 1: People face tradeoffs.
3-1a Copyright © 2024 Cengage Learning Ltd. 3-6

FIGURE 3.1
The Production Possibilities Frontier

FIGURE 3.1
The Production Possibilities Frontier (cont’d)

Active Learning
Production and Consumption with and without Trade
▪ Two countries: Canada and Japan

▪ Two goods: computers and wheat
▪ One resource: labour (measured in hours)
▪ We will look at how much of both goods each country produces
and consumes under two scenarios:
▪ If the country chooses to be self-sufficient
▪ If it trades with the other country

Active Learning
Production and Consumption with and without Trade (cont’d)
To draw Canada’s PPF…

▪ Canada has 50 000 hours of labour available for
production per month.
▪ Producing one computer requires 100 hours of labour.
▪ Producing one tonne of wheat requires 10 hours of
labour.
Computers appear on the horizontal axis.

Active Learning
Answers: Canada’s PPF
Wheat
(tonnes) Canada has enough labour to produce 500
5000 computers, or 5000 tonnes of wheat, or any
combination along the PPF.
4000
3000
2000
1000
Computers
0
100 200 300 400 500
Active Learning
Answers: Canada without Trade
Wheat
(tonnes) Suppose Canada uses half its labour
5000 to produce each of the two goods.
4000
Then it will produce and consume 250
3000 computers and 2500 tonnes of wheat.
2000
1000
0
100 200 300 400 500 Computers
Active Learning
Production and Consumption with and without Trade (cont’d)
To draw Japan’s PPF…

▪ Japan has 30 000 hours of labour available for production per month.
▪ Producing one computer requires 125 hours of labour.
▪ Producing one tonne of wheat requires 25 hours of labour.
Computers appear on the horizontal axis.

Active Learning
Answers: Japan’s PPF
Wheat
(tonnes)
Japan has enough labour to produce
2000 240 computers, or 1200 tonnes of
wheat, or any combination along the
PPF.
1000
0 Computers
100 200 300
Active Learning
Answers: Japan without Trade
Wheat
(tonnes) Suppose Japan uses half its labour to
produce each good.
2000
Then it will produce and consume 120

1000 computers and 600 tonnes of wheat.
0 Computers
100 200 300
Active Learning
Consumption with and without Trade
▪ Without trade
▪ Canadian consumers get 250 computers and 2500 tonnes of
wheat.
▪ Japanese consumers get 120 computers and 600 tonnes of
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.
Active Learning
Production under Trade
1. Suppose Canada produces 3400 tonnes of wheat. How

many computers would Canada be able to produce with
its remaining labour?
▪ Draw the point representing this combination of computers and
wheat on Canada’s PPF.
2. Suppose Japan produces 240 computers. How many tonnes

of wheat would Japan be able to produce with its remaining
labour?
▪ Draw this point on Japan’s PPF.
Active Learning
Answers: Canada’s Production with Trade
Wheat
(tonnes)
5000
Producing 3400 tonnes of wheat
requires 34 000 labour hours.
4000
The remaining 16 000 labour hours
3000 are used to produce 160 computers.
2000
1000
Computers
0
100 200 300 400 500
Active Learning
Answers: Japan’s Production with Trade
Wheat
(tonnes) Producing 240 computers requires
all of Japan’s 30 000 labour hours.
2000
So, Japan would produce 0 tonnes

of wheat.
1000
0 Computers
100 200 300
Active Learning
Consumption under Trade
Suppose Canada exports 700 tonnes of wheat to Japan and

imports 110 computers from Japan.
(Alternatively, Japan imports 700 tonnes of wheat and
exports 110 computers.)
▪ How much of each good is consumed in Canada?
▪ Plot this combination on Canada’s PPF.
▪ How much of each good is consumed in Japan?
▪ Plot this combination on Japan’s PPF.
Active Learning
Answers: Canada’s Consumption with Trade
Wheat (tonnes)
5000 computers wheat
produced 160 3400
4000
+ imported 110 0
3000 – exported 0 700
= amount
270 2700
2000 consumed
1000
Computers
0
100 200 300 400 500
Active Learning
Answers: Japan’s Consumption with Trade
Wheat
(tonnes) computers wheat
produced 240 0
2000 + imported 0 700
– exported 110 0
= amount
130 700
1000 consumed
Computers
0
100 200 300
Active Learning
Answers: Trade makes everyone better off
Canada
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
3-1 wheat 600 700 100

3-23
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Active Learning
Answers: Trade makes everyone better off (cont’d)
Wheat
▪ Point F: 100 computers, (tonnes)
(tons)
3000 tonnes of wheat 6,000
6000
5000
5,000
▪ Point F requires 4000
4,000
40 000 hours of labour. 3000
3,000
Possible but not efficient: FF
2000
2,000
could get more of either
1000
1,000
good without sacrificing
0
any of the other 0 100 200 300 400 500 600
Computers

SPECIALIZATION AND TRADE

▪ After several years of eating combination B, Ruby gets an
idea and goes to talk to Frank.
3-1b Copyright © 2024 Cengage Learning Ltd. 3-25

FIGURE 3.2
How Trade Expands the Set of Consumption Opportunities

FIGURE 3.2
How Trade Expands the Set of Consumption Opportunities (cont’d)

Quick Quiz
1. Before Frank and Ruby engage in 2. After Frank and Ruby engage in
trade, each trade, each
a. consumes at a point inside their a. consumes at a point inside their
production possibilities frontier. production possibilities frontier.
b. consumes at a point on their production b. consumes at a point on their production

possibilities frontier. possibilities frontier.
c. consumes at a point outside their c. consumes at a point outside their

production possibilities frontier. production possibilities frontier.
d. consumes the same amounts of meat d. consumes the same amounts of meat
and potatoes as the other. and potatoes as the other.

COMPARATIVE ADVANTAGE:
THE DRIVING FORCE OF SPECIALIZATION
▪ If Ruby is better at both raising cattle and growing potatoes,
how can Frank ever specialize in doing what he does best?
▪ Frank doesn’t seem to do anything best.
▪ To solve this puzzle, we need to look at the principle of
comparative advantage.

ABSOLUTE ADVANTAGE
▪ ABSOLUTE ADVANTAGE: the comparison among producers

of a good according to their productivity

OPPORTUNITY COST AND COMPARATIVE ADVANTAGE
▪ Rather than comparing inputs required, we can compare the
opportunity costs.
▪ OPPORTUNITY COST: whatever must be given up to obtain
some item

TABLE 3.1
The Opportunity Cost of Meat and Potatoes

COMPARATIVE ADVANTAGE AND TRADE
▪ COMPARATIVE ADVANTAGE: the comparison among
producers of a good according to their opportunity cost
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COMPARATIVE ADVANTAGE AND TRADE (CONT’D)
▪ The gains from specialization and trade are based not on
absolute advantage but rather on comparative advantage.
▪ When each person specializes in producing the good for
which they have a comparative advantage, total production in
the economy rises.
▪ Each benefits from trade by obtaining a good at a price that is
lower than their opportunity cost of that good.
COMPARATIVE ADVANTAGE AND TRADE (CONT’D)
▪ The moral of the story:
Trade can benefit everyone in society because it
allows people to specialize in activities in which
they have a comparative advantage.

THE PRICE OF TRADE
▪ What determines the price at which trade takes place?
▪ How are the gains from trade shared between the trading
parties?
▪ For both parties to gain from trade, the price at which they
trade must lie between the two opportunity costs.
3-2d Copyright © 2024 Cengage Learning Ltd. 3-36

Quick Quiz
3. In an hour, Mateo can wash 2 cars or 5. When Mateo and Sophia produce
mow 1 lawn, and Sophia can wash 3 efficiently and make a mutually
cars or mow 1 lawn. Who has the beneficial trade based on comparative
absolute advantage in car washing, and advantage,
who has the absolute advantage in
lawn mowing? a. Mateo mows more and Sophia washes
more.
a. Mateo in washing; Sophia in mowing
b. Mateo washes more and Sophia mows
b. Sophia in washing; Mateo in mowing more.
c. Mateo in washing; neither in mowing c. Mateo and Sophia both wash more.
d. Sophia in washing; neither in mowing d. Mateo and Sophia both mow more.

APPLICATIONS OF COMPARATIVE
ADVANTAGE
SHOULD CONNOR MCDAVID SHOVEL HIS OWN SIDEWALK?
▪ McDavid can shovel his sidewalk faster than
anyone else. But should he?

ADVANTAGE
SHOULD CANADA TRADE WITH OTHER COUNTRIES?
▪ Just as individuals can benefit from specialization and trade with
one another, so can populations of people in different countries.
▪ IMPORTS: goods and services produced abroad and sold domestically.
▪ EXPORTS: goods and services produced domestically and sold abroad.
▪ The principle of comparative advantage states that each good
should be produced by the country that has the smaller
opportunity cost of producing that good.
ADVANTAGE
SHOULD CANADA TRADE WITH OTHER COUNTRIES? (CONT’D)
▪ The opportunity cost of a car is 2 tonnes of food in Canada but only 1 tonne of food in
Japan, Japan has a comparative advantage in producing cars.
▪ Japan should produce more cars than it wants for its own use and export some of
them to Canada.
▪ The opportunity cost of a tonne of food is 1 car in Japan but only 1/2 car in Canada;
Canada has a comparative advantage in producing food.
▪ Canada should produce more food than it wants to consume and export some to
Japan.
▪ Through specialization and trade, both countries can have more food and more cars.
Quick Quiz
6. A nation will typically import those 8. Kayla can cook dinner in 30 minutes and
goods in which wash the laundry in 20 minutes. Her
roommate takes twice as long to do each
a. the nation has an absolute advantage. task. How should the roommates allocate the
work?
b. the nation has a comparative advantage.
c. other nations have an absolute a. Kayla should do more of the cooking based on
advantage. her comparative advantage.
d. other nations have a comparative b. Kayla should do more of the washing based on
advantage. her comparative advantage.
c. Kayla should do more of the washing based on

her absolute advantage.
d. There are no gains from trade in this situation.

Classroom Activity
A Short Trip with Many Contributors

Answer the following questions:
1. Think of a recent trip you have taken. The distance travelled is
unimportant; just choose a specific trip. Where did this trip start
and finish?
2. Who produced the goods and services that made your trip possible?
(List as many types of workers as possible.)
3. How were the different elements of your trip financed
(e.g., the vehicle, the road network, or the airport)?

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Adapted for the

Copyright © 2024 Cengage Learning Ltd. 3-1

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3 Copyright © 2024 Cengage Learning Ltd. 3-3

▪ Imagine that in the world there are:

3 Copyright © 2024 Cengage Learning Ltd. 3-4

3-1 Copyright © 2024 Cengage Learning Ltd. 3-5

3-1a Copyright © 2024 Cengage Learning Ltd. 3-6

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3-1a Copyright © 2024 Cengage Learning Ltd. 3-8

▪ Two countries: Canada and Japan

3-1 Copyright © 2024 Cengage Learning Ltd. 3-9

To draw Canada’s PPF…

3-1 Copyright © 2024 Cengage Learning Ltd. 3-10

To draw Japan’s PPF…

3-1 Copyright © 2024 Cengage Learning Ltd. 3-13

Then it will produce and consume 120

1. Suppose Canada produces 3400 tonnes of wheat. How

2. Suppose Japan produces 240 computers. How many tonnes

So, Japan would produce 0 tonnes

Suppose Canada exports 700 tonnes of wheat to Japan and

consumption consumption gains from

computers 250 270 20

wheat 2500 2700 200

consumption consumption gains from

computers 120 130 10

3-1 wheat 600 700 100

3-1 Copyright © 2024 Cengage Learning Ltd. 3-24

SPECIALIZATION AND TRADE

3-1b Copyright © 2024 Cengage Learning Ltd. 3-25

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3-1b Copyright © 2024 Cengage Learning Ltd. 3-27

b. consumes at a point on their production b. consumes at a point on their production

c. consumes at a point outside their c. consumes at a point outside their

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3-2 Copyright © 2024 Cengage Learning Ltd. 3-29

▪ ABSOLUTE ADVANTAGE: the comparison among producers

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c. Kayla should do more of the washing based on

d. There are no gains from trade in this situation.

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A Short Trip with Many Contributors

3 Copyright © 2024 Cengage Learning Ltd. 3-42

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