Trade in a One-Factor World The Gains from Trade If countries specialize according to their comparative advantage, they all gain from this specialization and trade. We will demonstrate these gains from trade in two ways. First, we can think of trade as an indirect method of production. Copyright © 2003 Pearson Education, Inc.

Trade in a One-Factor World Home L aLW . direct production (QWD) : PC PW . L aLC indirect production (QWI) :  aLC aLW < PC PW L aLC Relative price ofter trade: < L aLW aLC PC PW < QWD QWI . Copyright © 2003 Pearson Education, Inc.

Trade in a One-Factor World Foreign L* aLC* . direct production (Q*CD) : PW PC . L* aLW* indirect production (Q*CI) :  Relative price ofter trade: PC PW < aLC* aLw * PW PC > aLW* aLC * L* aLW* L* aLW* PW PC > aLC* Q*CI > Q*CD . Copyright © 2003 Pearson Education, Inc.

Trade in a One-Factor World Another way to see the gains from trade is to consider how trade affects the consumption in each of the two countries. The consumption possibility frontier states the maximum amount of consumption of a good a country can obtain for any given amount of the other commodity. In the absence of trade, the consumption possibility curve is the same as the production possibility curve. Trade enlarges the consumption possibility for each of the two countries. Copyright © 2003 Pearson Education, Inc.

Figure 2-4: Trade Expands Consumption Possibilities Trade in a One-Factor World Figure 2-4: Trade Expands Consumption Possibilities Quantity of cheese, QC of wine, QW Quantity of wine, Q*W of cheese, Q*C 證明 L PC aLC PW T P* F* L* aLC* aLW* aLW * PC PW PC PW F P L aLW aLC T* L*  PW aLW* PC (a) Home (b) Foreign Copyright © 2003 Pearson Education, Inc.