1. University of Hawai‘i at Mānoa Department of Economics
ECON 130 (003): Principles of Economics (Micro)
Gerard Russo
Lecture #2
Thursday, January 15, 2004

2. Key Concepts Absolute Advantage Comparative Advantage
Gains from Specialization and Trade
Terms of Trade
Opportunity Cost

3. United States Production Possibilities Frontier

4. USA Internal Terms of Trade
1 Coffee = 1 Wheat
1 Wheat = 1 Coffee
Opportunity Cost
Slope of the PPF

5. United States Production Possibilities Frontier

6. Brazil Production Possibilities Frontier

7. Brazil Internal Terms of Trade
2 Coffee = 1 Wheat
1 Coffee = 0.5 Wheat
Opportunity Cost
Slope of the PPF

8. Country Production Before Specialization
USA
Brazil
Wheat 18 8
Coffee 12 4

9. World Production Before Specialization
USA
Brazil
World
Wheat 18 8 26
Coffee 12 4 16

10. United States Production Possibilities Frontier

11. Brazil Production Possibilities Frontier

12. Production After Specialization
USA
Brazil
Wheat 30
Coffee 20

13. World Production After Specialization
USA
Brazil
World
Wheat 30
Coffee 20

14. Terms of Trade USA 1 Coffee = 1 Wheat Brazil 2 Coffee = 1 Wheat
World 1.5 Coffee = 1 Wheat

15. Production & Trade After Specialization
USA
Brazil
Wheat
30 – 10 (export)
(import)
Coffee
(import)
20 – 15 (export)

16. World Consumption After Specialization & Trade
USA
Brazil
World
Wheat 20 10 30
Coffee 15 5

17. Gains From Trade USA Brazil World Wheat 20 – 18 = 2 10 – 8 = 2
30 – 26 = 4
Coffee
15 – 12 = 3
5 – 4 = 1
20 – 16 = 4