Page 771 - Economics

CONFIRMING PAGES

PART TEN
680 keygraph
International Economics

45 FIGURE 35.2 Trading possibility
C
lines and the gains from trade. As a
40 result of specialization and trade, both the
United States and Brazil can have higher levels
of output than the levels attainable on their
35 domestic production possibilities curves.
Trading
(a) The United States can move from point
C possibilities line A on its domestic production possibilities
30 30
curve to, say, A on its trading possibilities line.
(b) Brazil can move from B to B .
Coffee (tons) 25 Coffee (tons) 25 c
20
20
possibilities
A Trading
15 15
line
10 A 10
B
5 5
B
W w w
0 5 10 15 20 25 30 0 5 10 15 20
Wheat (tons) Wheat (tons)
(a) (b)
United States Brazil

QUICK QUIZ 35.2

1. The production possibilities curves in graphs (a) and (b) imply: 3. After specialization and international trade, the world output of
a. increasing domestic opportunity costs. wheat and coffee is:
b. decreasing domestic opportunity costs. a. 20 tons of wheat and 20 tons of coffee.
c. constant domestic opportunity costs. b. 45 tons of wheat and 15 tons of coffee.
d. first decreasing, then increasing, domestic opportunity costs. c. 30 tons of wheat and 20 tons of coffee.
2. Before specialization, the domestic opportunity cost of d. 10 tons of wheat and 30 tons of coffee.
producing 1 unit of wheat is: 4. After specialization and international trade:
a. 1 unit of coffee in both the United States and Brazil. a. the United States can obtain units of coffee at less cost than
b. 1 unit of coffee in the United States and 2 units of coffee it could before trade.
in Brazil. b. Brazil can obtain more than 20 tons of coffee, if it so chooses.
c. 2 units of coffee in the United States and 1 unit of coffee c. the United States no longer has a comparative advantage in
in Brazil. producing wheat.
1 _
d. 1 unit of coffee in the United States and unit of coffee in d. Brazil can benefit by prohibiting coffee imports from the
2
Brazil. United States. Answers: 1. c; 2. b; 3. c; 4. a

in one product and trading for the other. The trading pos- which requires it to give up 1 ton of wheat for every ton of
sibilities lines in Figure 35.2 reflect the assumption that coffee it wants as it moves up its domestic production pos-
both nations specialize on the basis of comparative advan- sibilities line from, say, point W . Instead, the United
1 _
tage: The United States specializes completely in wheat States, through trade with Brazil, can get 1 tons of coffee
2
(at point W in Figure 35.2a ), and Brazil specializes com- for every ton of wheat it exports to Brazil, as long as Brazil
pletely in coffee (at point c in Figure 35.2b ). has coffee to export. Trading possibilities line WC thus
1 _
represents the 1 W 1 C trading ratio.
2
Improved Options Now the United States is not Similarly, Brazil, starting at, say, point c , no longer has
constrained by its domestic production possibilities line, to move down its domestic production possibilities curve,
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mcc26632_ch35_674-695.indd 680
mcc26632_ch35_674-695.indd 680 9/14/06 8:19:59 PM