Specialization and Trade

After several years of eating combination 15, the rancher gets an idea and goes to talk to the farmer:

RanolEjc: Farmer, my friend, have 1 got a deal for you! 1 know how to improve life for both of us. I think you should slop producing meal altogether and devote all your lime to growing potatoes. According to my calculations, if you work 8 hours a day growing potatoes youll produce 32 ounces of potatoes. If you give me 15 of those 32 ounces, IT1 give you 5 ounces of meat in return. In the end, you'll gel to eat 17 ounces of potatoes and 5 Ounces of meat every day, instead of the 16 ounces of potatoes and 4 ounces 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 2.| Fajcmfk: (sounding skeptical) That seems like a good deal for me. Hut I don't understand why you are offering it. If tin* deal is so good for me, it can't be good for you too. l\asc»r.K: Oh, but it isi Suppose I spend 6 hours a day raising cattle and 2 hours growing potatoes- Then I can produce 18 ounces of meat and 12 ounces of potatoes. After 1 give you 5 ounces of my meat in exchange for 15 ounces of your potatoes, I'll end up with 13 ounces of meat and 27 ounces of potatoes, instead of Ihe 12 ouncesof meat and

24 ounces of potatoes that I now get. So I will also consume more of both fixxls than I ilo now. [She points out panel (b) of Figure 2.)

Farmer: I don't know----This sounds too good to be true.

Rancher: It's really not as complicated as it first seems. Here—I've summarized my proposal for you in a simple table. |The rancher shows the farmer a copy of the table at tlx- bottom of Figure 2.)

Farmer: (after pausing to study the table) These calculations seem correct, but I am puzzled. How can this deal make us both better off?

Rancher: We can both benefit because trade allows each of us to specialize in doing what we do best. You will spend more time growing potatoes and less time raising cattle. I will spend more time raising cattle and less time growing potatoes. As a result of specialization and trade, each of us can consume more meat and more potatoes without working any more hours.

QUICK QUIZ Draw an example of a production possibilities frontier for Robinson Crusoe, a »h-pwrecked »»ilor who spend» his lime gathering coconuts and catching ft»h. Does this frontier limit Crusoe's consumption of coconuts and fish if he lives by himself? Does he face the same limits if he can trade with natives on the island?

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