Authors libby rittenberg 900

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In order to maximize the value of its output, a country must be
producing a combination of goods and services that lies on its
production possibilities curve.

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Suppose two countries each produce two goods and their opportunity
costs differ. If this is the case, there is an opportunity for trade
between the two countries that will leave both better off.

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International trade leads countries to specialize in goods and services
in which they have a comparative advantage.



The terms of trade determine the extent to which each country will
specialize. Each will increase production of the good or service in
which it has a comparative advantage up to the point where the
opportunity cost of producing it equals the terms of trade.



Free international trade can increase the availability of all goods and
services in all the countries that participate in it. Trade allows
countries to consume combinations of goods and services they would
be unable to produce.



While free trade increases the total quantity of goods and services
available to each country, there are both winners and losers in the
short run.

TRY IT!
Suppose the world consists of two countries, Alpha and Beta. Both
produce only two goods, computers and washing machines. Suppose
that Beta is much more populous than Alpha, but because workers in
Alpha have more physical and human capital, Alpha is able to produce
more of both goods than Beta.
Specifically, suppose that if Alpha devotes all its factors of production
to computers, it is able to produce 10,000 per month, and if it devotes
Attributed to Libby Rittenberg and Timothy Tregarthen
Saylor URL: />
Saylor.org

900