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

How Does Trade Work? ANTIGONISH NO TRADE –One bu. of oats trades for one pound of beef TRADE OPENS –An Antigonish merchant observes that she can take one pound of beef and get 2.4 bu. of oats in Pictou, not one bu. as 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. as at home

Trade Proceeds The Antigonish merchant buys local beef, sells it to a Pictou merchant 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 to an Antigonish merchant 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. per bu. oats Antigonish will produce for itself rather than pay more. –Equals a minimum price of beef equal to one bu. oats per lb. beef Maximum price of BEEF –2.4 bu. oats. per lb. beef. Pictou will produce for itself rather than pay more –Equals a minimum price of oats of.42 lbs. beef per bu. oats

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

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