TRADE PRODUCTION POSSIBILITIES ABSOLUTE ADVANTAGE Pictou has an
TRADE
PRODUCTION POSSIBILITIES
ABSOLUTE ADVANTAGE • Pictou has an absolute advantage in both beef and oats. It produces more output of each good with the same inputs. • Pictou farmers will be richer than Antigonish farmers because they can produce more of both products • But farmers in both counties can improve their well being by trade
Costs of Production Differ • Cost of Beef – Antigonish: 1 Bu. Oats /Lb. Beef – Pictou: 60/25 = 12/5 = 2. 4 Bu. Oats /Lb. Beef • Cost Of Oats – Antigonish: 1 Lb. Beef /Bu Oats – Pictou: 25/60 = 5/12 =. 42 Lb. Beef /Bu. Oats
Comparative Advantage • Pictou has a comparative advantage in oats – A bushel of oats cost. 42 lbs. beef in Pictou but one lb. beef in Antigonish • Antigonish has a comparative advantage in beef – A pound of beef costs 1 bu. of oats in Antigonish, but 2. 4 bu. of oats in Pictou • If costs differ, each trading partner has a comparative advantage in one of the goods
Gains from Trade: Antigonish
Gains from Trade: another view
Gains from Trade
Pictou’s Gains from Trade Gives 1. 33 bu. oats per lb. beef
Pictou’s Gains from Trade
How Does Trade Work Out? • ANTIGONISH • NO TRADE – One bu. of oats trades for one pound of beef • TRADE OPENS – An Antigonixh merchant observes that she can take one pound of beef and get 2. 4 bu. of oats in Pictou, not one bu. at home. • PICTOU • NO TRADE – One bu. of oats trades for. 42 pounds of beef. • TRADE OPENS – A Pictou merchant observes that he can take one bu. of oats and get one pound of beef in Antigonish, not. 42 lbs. at home
Trade Proceeds • The Antigonish merchant buys local beef, sells it in Pictou and brings back oats • In Antigonish the quantity of oats available rises, the quantity of beef falls • The price of beef rises, the price of oats falls • The Pictou merchant buys local oats, sells them in Antigonish and brings back beef • In Pictou the quantity of beef available rises, the quantity of oats falls. • The price of oats rises, the price of beef falls
Range of Rates of Exchange • Maximum price of OATS – one lb. beef. Antigonish will produce for itself rather than pay more. – Equals a minimum price of beef of one bu. oats • Maximum price of BEEF – 2. 4 bu. oats. Pictou will produce for itself rather than pay more – Equals a minimum price of oats of. 42 lbs. beef
Possible Range of Prices • If both counties specialize completely, prices will lie between the maximum and the minimum. • If Pictou continues to produce some beef, because Antigonish can’t supply enough for both, trade will occur at Pictou’s opportunity cost • In that case, all the gains from trade go to Antigonish
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