International Trade and Trade Policy Chapter Six: International Trade and Trade Policy

Gains from Trade

Figure 6.1: Portugal’s Production-Possibilities Frontier Portugal can produce 200 units of wine if it specializes in wine, or 100 units of cloth, if it specializes in cloth. Or it can produce any combination on the line between these two points. However it would like to consume a larger bundle—represented by point A.

Figure 6.2: England’s Production-Possibilities Frontier England can produce 200 units of wine if it specializes in wine, or 400 units of cloth, if it specializes in cloth. Or it can produce any combination on the line between these two points. However it would like to consume a larger bundle—represented by point B.

Table 6.1: Production, Exchange, and Consumption of Wine and Cloth

Table 6.2: Opportunity Cost and Comparative Advantage

Drawbacks of Free Trade

Table 6.3: A Different Outcome of Exchange and Consumption

Appendix: A Formal Theory of Gains from Trade

Figure 6.3: Joint Production Possibilities Frontier for England and Portugal By specializing efficiently, England and Portugal together can produce these combinations of wine and cloth.

Figure 6.4: Efficient and Inefficient Joint Production Possibilities Frontier If England and Portugal specialized in an inefficient way, the joint production possibilities frontier would bow in rather than out.