1. Trade Analysis Analyzing Trade Problems using a 4-step process

2. 4-step process to solve all trade problems:
1) Construct a trade table with numerical ratios of trade-offs:
Determine which country has an absolute & comparative advantage in each good
Determine which country will produce which good
Find the range of acceptable trade that makes each country better off.
Terms of Trade
Coffee
1000
1000
Coffee
500
Wheat
1000
Wheat

3. Set up an Opportunity Cost Table
Coffee
Coffee
BRAZIL
1000
1000
MEXICO
STEP #1
Set up an Opportunity Cost Table
1000
500
Wheat
Wheat
Opportunity Cost Table
BRAZIL MEXICO
1 Coffee = ____ Wheat Coffee = _____ Wheat
1 Wheat = ____ Coffee Wheat = ____ Coffee
(gain) (cost) 1
1/2 1 2

4. Step #3 STEP #2 Mexico produces Coffee & Brazil produces Wheat Brazil:
1000 Coffee or
1000 Wheat
STEP #2
Determine who has a:
ABSOLUTE/COMPARITVE
ADVANTAGE
Mexico
1000 Coffee or
500 Wheat
BRAZIL MEXICO
1 Coffee = __1__ Wheat Coffee = __1/2___ Wheat
1 Wheat = __1__ Coffee Wheat = __2__ Coffee
Equally efficient at Coffee
Absolute Advantage Wheat
Comparative Advantage Wheat
Equally efficient at Coffee
Comparative Advantage Coffee
Step #3
Determine who will produce which good
Mexico produces Coffee & Brazil produces Wheat

5. Ranges for Efficient Trade (Terms of Trade)
Step #4
Develop Terms of Trade
BRAZIL MEXICO
1 Coffee = ____Wheat Coffee = _____ Wheat
1 Wheat = ____ Coffee Wheat = ____Coffee
Ranges for Efficient Trade (Terms of Trade)
wheat 1
1/2
coffee 1 2
Wheat Trading: must be higher than the opportunity cost
300 wheat
400 coffee = .75
Mexico must buy wheat at a ratio above ½ wheat per coffee
Coffee Trading: must between higher than the opportunity cost
Brazil must sell Wheat at a ratio below 1 wheat per coffee
300 wheat
400 coffee = 1.33
Terms of Trade: above ½ & below 1 wheat per coffee or
above 1 & below 2 coffee per wheat

6. Graph a beneficial Trade
Graphing Trade
Graph a beneficial Trade
BRAZIL MEXICO
Coffee
1000
1000
.(300, 600)
after trade
Coffee
.(700, 400)
* (500,500)
after trade
* (250,500)
500
Wheat
1000
Wheat
Trade Example:
BRAZIL
MEXICO
400 Coffee
0 Coffee
1,000 Wheat
1,000 Coffee
0 Wheat
300 Wheat