Production Possibilities Curve/Frontier -

Rum Crystal 1 million 100, ,000 30,000 A B 0 C 80,000 40, ,000 Ireland Puerto Rico A B C Crystal Rum ABCABC 1 million 0 700,00030, ,000 ABCABC 80, , ,000

Ireland Puerto Rico Which country has the absolute advantage in the production of Crystal? In the production of Rum? What did I tell you to do with absolute advantages? KICK IT OUT THE DOOR!!! Rum Crystal 1 million 100, ,000 30,000 A B 0 C Rum Crystal 80,000 40, ,000 A B C

Ireland Puerto Rico Which country has the comparative advantage in Crystal? In Rum? Rum Crystal 1 million 100, ,000 30,000 A B 0 C Rum Crystal 80,000 40, ,000 A B C

Puerto Rico There are___steps in figuring out which country has the comparative advantage. 5 Rum Crystal 1 million 100, ,000 30,000 A B 0 C Ireland Rum Crystal 80,000 40, ,000 A B C

1. Know the definition of comparative advantage One entity can produce something at a LOWER MARGINAL OPPORTUNITY COST than another entity. 2. Set up a table: Ireland Puerto Rico 1 Rum = __Crystal 1 Crystal = __ Rum 1 Crystal = __Rum 3. Go to the Xtremes (X and Y Games) Rum Crystal 1 million 100, ,000 30,000 A B 0 C Ireland Rum Crystal 80,000 40, ,000 A B C

Puerto Rico 1. Know the definition of comparative advantage 2. Set up a table: Ireland Puerto Rico 1 Rum = __Crystal 1 Crystal = ____ Rum 1 Crystal = __Rum 3. Go to the Xtremes (X and Y Games) 4. Fill in the blanks (starting with Puerto Rico first) /10 5. Circles and Arrows Rum Crystal 1 million 100, ,000 30,000 A B 0 C Ireland Rum Crystal 80,000 40, ,000 A B C

Puerto Rico We decided that Ireland should produce ALL the crystal and Puerto Rico should produce ALL the rum. How much crystal should Ireland produce? 1 million cases How much rum should Puerto Rico produce?80,000 barrels Should Ireland just hold onto its cases of crystal and Puerto Rico just hold onto its barrels of rum? NO! What should each country do after specialization?Trade Rum Crystal 1 million 100, ,000 30,000 A B 0 C Ireland Rum Crystal 80,000 40, ,000 A B C

Puerto Rico Consumes Consumes after specialization before Trade Produces Trades and Trade (Point B) Gain from Trade C 1 million -175,000 R 0 +35, ,000 35, ,000 30, , ,000 IRELAND PUERTO RICO C 0 R 80, , ,000175,000 45,000 40, ,000 +5,000 Rum Crystal 1 million 100, ,000 30,000 A B 0 C Ireland Rum Crystal 80,000 40, ,000 A B C

Puerto Rico Consumes Consumes after specialization before Trade Produces Trades and Trade (Point B) Gain from Trade C 1 million -175,000 R 0 +35, ,000 35, ,000 30, , ,000 IRELAND PUERTO RICO C 0 R 80, , ,000175,000 45,000 40, ,000 +5,000 Plot this column 35, ,000 D D Rum Crystal 1 million 100, ,000 30,000 A B 0 C Ireland Rum Crystal 80,000 40, ,000 A B C 175,000

Puerto Rico 45, ,000 Which country is obviously better off through this specialization and trade--Ireland or Puerto Rico? Both Countries are!!! Both countries are now outside their own production capabilities. Through specialization and trade all parties are better off. 825,000 Rum Crystal 1 million 100, ,000 30,000 A B 0 C Ireland 35,000 D Rum Crystal 80,000 40, ,000 A B C D

Cars Tractors Production Possibilities Curve for Atlantis Production Possibilities Curve for Xanadu M N P Q

Cars Tractors Production Possibilities Curve for Atlantis Production Possibilities Curve for Xanadu M N P Q Assume that two countries, Atlantis and Xanadu, have equal amounts of resources. Atlantis can produce 30 cars or 10 tractors or any combination, as shown by the line MN in the figure above. Xanadu can produce 20 cars or 40 tractors or any combination, as shown by the line PQ in the figure above.

Cars Tractors Production Possibilities Curve for Atlantis Production Possibilities Curve for Xanadu M N P Q (a) Which country has an absolute advantage in the production of tractors? Explain how you determined your answer.

Cars Tractors Production Possibilities Curve for Atlantis Production Possibilities Curve for Xanadu M N P Q (b) Which country has a comparative advantage in the production of cars? Using the concept of opportunity costs, explain how you determine your answer.

Cars Tractors Production Possibilities Curve for Atlantis Production Possibilities Curve for Xanadu M N P Q (c) If the two countries specialize and trade with each other, which country will import cars? Explain why.

Cars Tractors Production Possibilities Curve for Atlantis Production Possibilities Curve for Xanadu M N P Q (d) If the terms of trade are such that one car can be exchanged for one tractor, explain how Atlantis will benefit from such trade.

Cars Tractors Production Possibilities Curve for Atlantis Production Possibilities Curve for Xanadu M N P Q Assume that two countries, Atlantis and Xanadu, have equal amounts of resources. Atlantis can produce 30 cars or 10 tractors or any combination, as shown by the line MN in the figure above. Xanadu can produce 20 cars or 40 tractors or any combination, as shown by the line PQ in the figure above.

Cars Tractors Production Possibilities Curve for Atlantis Production Possibilities Curve for Xanadu M N P Q (a) Which country has an absolute advantage in the production of tractors? Explain how you determined your answer. Xanadu has the absolute advantage in tractors. It can produce more tractors than Atlantis.

Cars Tractors Production Possibilities Curve for Atlantis Production Possibilities Curve for Xanadu M N P Q (b) Which country has a comparative advantage in the production of cars? Using the concept of opportunity costs, explain how you determine your answer. Atlantis 1car = __ trac. 1 trac = __ cars Xanadu 1 car = __ trac. 1 trac = __ cars 1/ /2 Atlantis has the comparative advantage in cars. It’s marginal opportunity cost of producing a car is less than Xanadu’s (1/3 trac. compared to ½).

Cars Tractors Production Possibilities Curve for Atlantis Production Possibilities Curve for Xanadu M N P Q (c) If the two countries specialize and trade with each other, which country will import cars? Explain why. Xanadu should import cars. The opportunity cost of producing a car in Xanadu is too high. It would have to give up the production of 2 tractors. Atlantis 1car = __ trac. 1 trac = __ cars Xanadu 1 car = __ trac. 1 trac = __ cars 1/ /2

Cars Tractors Production Possibilities Curve for Atlantis Production Possibilities Curve for Xanadu M N P Q (d) If the terms of trade are such that one car can be exchanged for one tractor, explain how Atlantis will benefit from such trade. Atlantis 1car = __ trac. 1 trac = __ cars Xanadu 1 car = __ trac. 1 trac = __ cars 1/ /2 If Atlantis were to produce its own tractors, it would have to give up the production of 3 cars. By trading 1 tractor for 1 car, this is a good terms of trade because Atlantis gets to a point outside its own PP curve.

MarsVenus Food Clothing * *

MarsVenus Food Clothing * * Constant or Increasing?

MarsVenus Food Clothing * * Absolute Advantage?

MarsVenus Food Clothing * * Comparative Advantage?

PP Curve Interactive, Part II