; Trade
Documents
Resources
Learning Center
Upload
Plans & pricing Sign in
Sign Out
Your Federal Quarterly Tax Payments are due April 15th Get Help Now >>

Trade

VIEWS: 3 PAGES: 14

  • pg 1
									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
   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                         • PICTOU
• NO TRADE                           • NO TRADE
  – One bu. of oats trades for         – One bu. of oats trades for
    one pound of beef                    .42 pounds of beef.
• TRADE OPENS                        • TRADE OPENS
  – 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
                 Trade Proceeds
• The Antigonish merchant        • The Pictou merchant
  buys local beef, sells it to     buys local oats, sells
  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
Gains from Trade: Antigonish
   ANTIGONISH POSSIBILITIES WITH
                 TRADE
    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
  Gains from Trade
                 Antigonish PPB

       140
       120
       100
OATS




        80
        60
        40
        20
         0
             0       50          100   150
                          BEEF
   Pictou’s Gains from Trade
 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’s Gains from Trade
                    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

								
To top