3

Interdependence and
the Gains from Trade

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 Interdependence
Every day you
rely on many
hair gel from
people from Cleveland, OH
around the world,
most of whom cell phone
you’ve never from Taiwan
met, to provide
dress shirt
you from China
with the goods
and services you coffee from
enjoy. Kenya
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as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning 2
management system for classroom use.
 Interdependence
• “Trade can make everyone better off”
– One of the Ten Principles from Chapter 1
– We now learn why people – and nations –
choose to be interdependent
– And how they can gain from trade

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as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning 3
management system for classroom use.
 Productivity & Opportunity Cost
• Labor Productivity: Output per hour

• Opportunity cost:
– Whatever must be given up to obtain
some item
– The value of the best alternative

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 Comparative Advantage
• Absolute advantage: the ability to
produce a good using fewer inputs than
another producer
• Comparative advantage: the ability to
produce a good at a lower opportunity
cost than another producer
 Comparative Advantage
• Comparative advantage
– Produce a good at a lower opportunity
cost than another producer
– Reflects the relative opportunity cost
• Principle of comparative advantage
– Each good - produced by the individual
that has the smaller opportunity cost of
producing that good

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 Principle of Comparative Advantage

• 口語來說，絕對利益是以 ( 勞動 ) 生產力
來衡量，而比較利益是以機會成本來衡量。
• 每個國家應生產自己具有比較利益的商品，
然後進行自由貿易。
• 專業分工 (specialization) + 自由貿易
(trade)
 A Parable for the Modern Economy
• Only two goods
– Meat
– Potatoes
• Only two people
– Rancher
– Farmer

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 Figure 1
The Production Possibilities Frontier (a)

Panel (a) shows the production opportunities available to the farmer and the rancher.

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 Table 1
The Opportunity Cost of Meat and Potatoes

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 • Farmer’s Production Possibility Frontier
(PPF):
60 𝑀 +15 𝑃 =480
• Rancher’s PPF:
•

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 Figure 1
The Production Possibilities Frontier (b, c)
(b) The farmer’s production (c) The rancher’s production
possibilities frontier possibilities frontier
Meat (oz) Meat (oz)
If there is no trade, the farmer If there is no trade, the
chooses this production and 24 rancher chooses this
consumption. production and consumption.

8
12 B

4 A

0 16 32 0 24 48
Potatoes (oz) Potatoes (oz)
Panel (b) shows the combinations of meat and potatoes that the farmer can produce. Panel (c)
shows the combinations of meat and potatoes that the rancher can produce. Both production
possibilities frontiers are derived assuming that the farmer and rancher each work 8 hours per
day. If there is no trade, each person’s production possibilities frontier is also his or her
consumption possibilities frontier.
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 Specialization Improves Efficiency
MEAT POTATO

FARMER -1 +4

RANCHER +1 -2

TOTAL +0 +2

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 A Parable for the Modern Economy
• Specialization and trade
– Farmer – specialize in growing potatoes
• More time growing potatoes
• Less time raising cattle
– Rancher – specialize in raising cattle
• More time raising cattle
• Less time growing potatoes
– Trade: 5 oz of meat for 15 oz of potatoes
– Both gain from specialization and trade

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 Trade is mutually beneficial
• Rancher’s proposal:
– Farmer produces 32oz potatoes
– Farmer give 15oz potatoes to Rancher
– Rancher give 5oz meat to Farmer
– Farmer can consume 17oz potatoes and 5oz
meat. Better than before.
– Rancher produces 18oz meat and 12oz
potatoes.
– Rancher can consume 13oz meat and 27oz
potatoes. Better than before.

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 Figure 2
How Trade Expands the Set of Consumption Opportunities (a, b)
(a) The farmer’s production (b) The rancher’s production
and consumption and consumption
Meat (oz) Meat (oz)
Farmer's production Rancher’s production Rancher’s
and consumption with trade production and
24
without trade consumption
18 without trade
Farmer's
8 consumption Rancher’s
with trade 13 B*
A* 12 consumption
5 Farmer's B with trade
4 production
A
with trade

0 16 17 32 0 12 24 27 48
Potatoes (oz) Potatoes (oz)
The proposed trade between the farmer and the rancher offers each of them a combination of
meat and potatoes that would be impossible in the absence of trade. In panel (a), the farmer gets
to consume at point A* rather than point A. In panel (b), the rancher gets to consume at point B*
rather than point B. Trade allows each to consume more meat and more potatoes.
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 Figure 2
How Trade Expands the Set of Consumption Opportunities (c)

The proposed trade between the farmer and the rancher offers each of them a
combination of meat and potatoes that would be impossible in the absence of trade. In
panel (a), the farmer gets to consume at point A* rather than point A. In panel (b), the
rancher gets to consume at point B* rather than point B. Trade allows each to consume
more meat and more potatoes.
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 專業分工的程度受需求影響
• 本例中 Rancher 除了生產肉，也生產少量的馬鈴
薯，沒有完全專業分工。這是因為兩人對馬鈴薯的
偏好都高，而 Farmer 的產能比較小。如果完全專
業分工， Farmer 的產量恐無法應付兩人所需。
( 在貿易之前，兩人的馬鈴薯消費總合就已經 40oz
了，而 Farmer 專業生產也只能產出 32oz 。 )
• 若是 Rancher 對馬鈴薯的需求小一些，例如假設貿
易前 Rancher 消費 12oz 馬鈴薯和 18oz 肉，則貿
易後 Rancher 有可能專業生產肉。例如 Rancher
可專業生產 24oz 肉，然後拿 5oz 肉向 Farmer 換
15oz 馬鈴薯，這樣 Rancher 可消費 15oz 馬鈴薯和
19oz 肉，比貿易前好。
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 Comparative Advantage
• One person
– Can have absolute advantage in both
goods
– Cannot have comparative advantage in
both goods
• For different opportunity costs
– One person - comparative advantage in
one good
– The other person - comparative
advantage in the other good
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 Comparative Advantage
• Opportunity cost of one good
– Inverse of the opportunity cost of the other
• Gains from specialization and trade
– Based on comparative advantage
– Total production in economy rises
• Increase in the size of the economic pie
• Everyone – better off

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 Comparative Advantage
• Trade can benefit everyone in society
– Allows people to specialize
• The price of trade
– Must lie between the two opportunity
costs
• Principle of comparative advantage
explains:
– Interdependence
– Gains from trade
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 Applications of Comparative Advantage
• Principle of comparative advantage
– Each good – produced by the country with
the smaller opportunity cost of producing
that good
• Specialization and trade
– All countries have more food and more
cars

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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.
 Should LBJ Mow His Lawn?
• Opportunity cost of mowing his lawn
• Use the time to film a TV commercial
• Hire some one to mow the lawn
• Beneficial to everybody

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 Dividing the Chores
• Housework: Cooking, Cleaning,
Shopping, Child caring, … etc.
• Dividing the chores according the
principle of comparative advantage?

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 李嘉圖與自由貿易
• David Ricardo (1772—1823)
• 生產一單位商品所需的工時 :
England Portugal
布 50 hrs 25 hrs
酒 200 hrs 25 hrs
• 葡國不論是生產布或酒都英國有較高的生
產力。在這兩產品的生產上，葡國有絕對
利益 (absolute advantage) 。
• 英國在布的生產上有比較利益
(comparative advantage) 。
• 英國生產 1 單位布的時間可以生產 1/4
單位的酒
• 葡國生產 1 單位布的時間可以生產 1 單
的酒
• 以酒來衡量，英國生產布的機會成本較葡
國低，所以說 : 英國在布的生產有比較利
益
• 英國多生產 1 單位布，減少了 1/4 單
位的酒。
• 葡國少生產 1 單位布，可多生產 1 單
位的酒。
• 兩國整合在一起，總共多出了 3/4 單位
的酒。
• 一旦兩國生產布的機會成本不同，貿易
只可能有利，不會有害。
 李嘉圖與自由貿易
• 在 19 世紀初，英國有所謂穀物法案
(Corn Laws) ，以關稅及其他方式限制小麥
及其他農產品的輸入。
• 李嘉圖以其理論反對該法案，並大力鼓吹
自由貿易。
• James Wilson 在自由貿易理論的吸引下，
於 1843 年開始出版著名的雜誌 The
Economist ，推動自由貿易與自由市場。
• 到了 1846 年，穀物法案告終，英國轉變
成進口農產品而出口工業品。其他國家開
始效法，逐漸降低貿易障礙。