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```									TRADE
PRODUCTION POSSIBILITIES
Antigonish          Pictou
Output per family on a 100 acre
family farm
OATS      BEEF OATS BEEF
bu       lb      bu     lb
100       0      300     0
80      20      240    25
60      40      180    50
40      60      120    75
20      80      60     100
0       100      0     125
PRODUCTION POSSIBILITIES

140

120
100               Pictou
BEEF

80

60

40
Antigonish
20
0
0   50     100        150      200   250   300   350
OATS
• 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
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
• 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
• ANTIGONISH                         • PICTOU
– One bu. of oats trades for         – One bu. of oats trades for
one pound of beef                    .42 pounds of beef.
– An Antigonish merchant             – A Pictou merchant observes
observes that she can take           that he can take one bu. of
one pound of beef and get            oats and get one pound of
2.4 bu. of oats in Pictou, not       beef in Antigonish, not .42
one bu. as at home.                  lbs. as at home
• The Antigonish merchant        • The Pictou merchant
a Pictou merchant and            them to an Antigonish
brings back oats                 merchant and brings
• In Antigonish the quantity       back beef
of oats available rises, the   • In Pictou the quantity of
quantity of beef falls           beef available rises, the
• The price of beef rises, the     quantity of oats falls.
price 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
ANTIGONISH POSSIBILITIES WITH
Receive 1.33 bu. oats per lb. beef
produce sell beef buy oats beef left
100         0         0       100
100        20       27          80
100        40       53          60
100        60       80          40
100        80      106          20
100      100       133           0
Antigonish PPB

140
120
100
OATS

80
60
40
20
0
0       50          100   150
BEEF
Gives 1.33 bu. oats per lb. beef
OATS         sell oats    buy beef    oats left
300            0           0          300
300           60          45          240
300          120          90          180
300          180         135          120
300          240         180            60
300          300         225             0
Pictou PPB

350
300
250
OATS

200
150
100
50
0
0     100          200   300
BEEF
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

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