Mankiw: Interdependence (Economics)

This 3rd chapter begins with the parable of the rancher with meat and the farmer with potatoes.  If each wants to eat meat and potatoes, they must agree on the value for each to make the trade equitable.  Numerous scenarios can occur in order for both to have the desired meal, even if they choose not to deal with each other.  By formulating deals that the other likes, they can come up with a profitable exchange for both.

One or the other can have an advantage in the exchange, depending on the concepts of supply and demand. With low competition, one or the other can have a prestigious position in the exchange and enhance his values.  Adam Smith makes the proposition that one should calculate the costs of home manufacture or production against the cost to simply buy from another.  If it isn't worth it, don't do it.  Another example, should Tiger Woods mow his own lawn.  The answer is no, if he can make 10,000 during the same time on the course.  The same thing can apply to having other nations produce goods for consumption here.  Comparative advantage is this principle of economic consumption.  Should a country do it.  The book says yes.

Chapter 4  Supply and Demand

Prices shift according to how much is on the market for consumption.  Competition with sellers improves the buying ability of the public.  Monopolies threaten that.  Factors affect the ability to buy--ie, employment, income, comparisons, personal tastes, etc.  Increasing prices eliminate buyers.

Prices can manipulate the number who smoke.  However, there could be trade offs--for example, drug use in its place.  So simply altering the dynamic between supply and demand can have a down side.  Shifting the prices can have huge effects--sales can work.  A seller looks for an equilibrium, beneficial both to himself and the buyer.  External changes like weather can affect the value and shift the equilibrium.


These two chapters explain why we trade and how to fix the prices.  What I have garnered is a little more understanding why the US has a perceived trade imbalance.



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