Page 53 - The Principle of Economics

CHAPTER 3 INTERDEPENDENCE AND THE GAINS FROM TRADE 51
(a) How Trade Increases the Farmer’s Consumption
Figure 3-2
HOW TRADE EXPANDS THE
SET OF CONSUMPTION OPPORTUNITIES. 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.
A*
Farmer’s consumption with trade
Farmer’s consumption without trade
A
Meat (pounds)
3
2
1
0
Meat (pounds)
40
21 20
0
4 Potatoes (pounds) (b) How Trade Increases the Rancher’s Consumption
2 3
Rancher’s consumption with trade
B*
Rancher’s consumption without trade
B
2 1/2 3 5 Potatoes (pounds)
FARMER:
produce 4 pounds of potatoes. If you give me 1 of those 4 pounds, I’ll give you 3 pounds of meat in return. In the end, you’ll get to eat 3 pounds of potatoes and 3 pounds of meat every week, instead of the 2 pounds of potatoes and 1 pound of meat you now get. If you go along with my plan, you’ll have more of both foods. [To illustrate her point, the rancher shows the farmer panel (a) of Figure 3-2.]
(sounding skeptical) That seems like a good deal for me. But I don’t understand why you are offering it. If the deal is so good for me, it can’t be good for you too.