note3 - Chapter 3 Professor Lee Ohanian Econ 2 The Gains...

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Chapter 3 Professor Lee Ohanian Econ 2 The Gains from Trading Individuals – or countries – who trade are typically made better off than if they do not trade. That is, they can enjoy consuming more of all goods if they trade, than if they don’t trade. To see this, consider two individuals, David and Jack, and there are two goods: bread and cheese. David has the following production possibilities frontier for these two goods: David can produce a maximum of 100 pounds of cheese, if all the factors of production are used for cheese, and can produce a maximum of 400 loaves of bread, if all the factors of production are used for baking bread. If we plot bread production on the vertical axis, and cheese production on the horizontal axis, the PPF is a straight line with a slope of -4; that is, his
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opportunity cost of producing an additional pound of cheese is to give up 4 loaves of bread. Jack has the following production possibilities frontier. Jack can produce a maximum of 500 pounds of cheese, or can produce a maximum of 50 loaves of bread. Jack’s PPF is a straight line, with a slope of -1/10: his opportunity cost is that he has to give up 1/10 of a loaf of bread to produce 1 additional pound of cheese. First, note that David has an absolute advantage in producing bread. That is, the David is more efficient at producing bread than is Jack.
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