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Production Possibilities Curve/Frontier-
Rum Rum
Crystal Crystal1 million
100,000
700,000
30,000
A
B
0
C
80,000
40,000
0 40,000 80,000
Ireland Puerto Rico
A
B
C
Crystal Rum Crystal RumABC
1 million 0700,000 30,000 0 100,000
ABC
80,000 040,000 40,000 0 80,000
Ireland Puerto RicoWhich country has the absolute advantage in the productionof Crystal? In the production of Rum?
What did I tell you to do with absolute advantages?
KICK IT OUT THE DOOR!!!
Rum
Crystal
1 million
100,000
700,000
30,000
A
B
0
C
Rum
Crystal
80,000
40,000
0 40,000 80,000
A
B
C
Ireland Puerto Rico
Which country has the comparative advantage in Crystal?In Rum?
Rum
Crystal
1 million
100,000
700,000
30,000
A
B
0
C
Rum
Crystal
80,000
40,000
0 40,000 80,000
A
B
C
Puerto Rico
There are___steps in figuring out which country has the comparative advantage.
5
Rum
Crystal
1 million
100,000
700,000
30,000
A
B
0
C
IrelandRum
Crystal
80,000
40,000
0 40,000 80,000
A
B
C
1. Know the definition of comparative advantageOne entity can produce something at a LOWER MARGINAL OPPORTUNITY COST than another entity.
2. Set up a table: Ireland Puerto Rico1 Rum = __Crystal 1 Rum = __Crystal1 Crystal = __ Rum 1 Crystal = __Rum
3. Go to the Xtremes (X and Y Games)
Rum
Crystal1 million
100,000
700,000
30,000
A
B
0C
IrelandRum
Crystal
80,000
40,000
0 40,000 80,000
A
B
C
Puerto Rico
1. Know the definition of comparative advantage
2. Set up a table: Ireland Puerto Rico1 Rum = __Crystal 1 Rum = __Crystal1 Crystal = ____ Rum 1 Crystal = __Rum
3. Go to the Xtremes (X and Y Games)
4. Fill in the blanks (starting with Puerto Rico first)
11
101/10
5. Circles and Arrows
Rum
Crystal1 million
100,000
700,000
30,000
A
B
0C
IrelandRum
Crystal
80,000
40,000
0 40,000 80,000
A
B
C
Puerto Rico
We decided that Ireland should produce ALL the crystal andPuerto Rico should produce ALL the rum. How much crystal shouldIreland produce? 1 million cases
How much rum should Puerto Rico produce? 80,000 barrels
Should Ireland just hold onto its cases of crystal and Puerto Rico justhold onto its barrels of rum? NO!What should each country do after specialization? Trade
Rum
Crystal1 million
100,000
700,000
30,000
A
B
0C
IrelandRum
Crystal
80,000
40,000
0 40,000 80,000
A
B
C
Puerto Rico Consumes Consumes after specialization before Trade
Produces Trades and Trade (Point B) Gain from Trade
C 1 million -175,000R 0 +35,000
825,00035,000
700,00030,000
+125,000+ 5,000
IRELAND
PUERTO RICOC 0R 80,000 -35,000
+175,000 175,00045,000
40,00040,000
+135,000+5,000
Rum
Crystal1 million
100,000
700,000
30,000
A
B
0C
IrelandRum
Crystal
80,000
40,000
0 40,000 80,000
A
B
C
Puerto Rico Consumes Consumes after specialization before Trade
Produces Trades and Trade (Point B) Gain from Trade
C 1 million -175,000R 0 +35,000
825,00035,000
700,00030,000
+125,000+ 5,000
IRELAND
PUERTO RICOC 0R 80,000 -35,000
+175,000 175,00045,000
40,00040,000
+135,000+5,000
Plotthiscolumn
35,000
825,000 D
D
Rum
Crystal1 million
100,000
700,000
30,000
A
B
0C
IrelandRum
Crystal
80,000
40,000
0 40,000 80,000
A
B
C
175,000
Puerto Rico
45,000
175,000
Which country is obviously better off through this specialization and trade--Ireland or Puerto Rico?
Both Countries are!!!Both countries are now outside their own productioncapabilities. Through specialization and trade allparties are better off.
825,000
Rum
Crystal1 million
100,000
700,000
30,000
A
B
0C
Ireland
35,000
D
Rum
Crystal
80,000
40,000
0 40,000 80,000
A
B
C
D
Car
s
Tractors10 40
20
30 Production Possibilities Curve forAtlantis
Production Possibilities Curve for Xanadu
M
N
P
Q
Car
s
Tractors10 40
20
30 Production Possibilities Curve forAtlantis
Production Possibilities Curve for Xanadu
M
N
P
Q
Assume that two countries, Atlantis and Xanadu, have equal amounts of resources. Atlantis can produce 30 cars or 10 tractors or any combination, as shown by the line MN in the figure above. Xanadu can produce 20 cars or 40 tractors or any combination, as shown by the line PQ in the figure above.
Car
s
Tractors10 40
20
30 Production Possibilities Curve forAtlantis
Production Possibilities Curve for Xanadu
M
N
P
Q
(a) Which country has an absolute advantage in the production of tractors? Explain how you determined your answer.
Car
s
Tractors10 40
20
30 Production Possibilities Curve forAtlantis
Production Possibilities Curve for Xanadu
M
N
P
Q
(b) Which country has a comparative advantage in the production of cars? Using the concept of opportunity costs, explain how you determine your answer.
Car
s
Tractors10 40
20
30 Production Possibilities Curve forAtlantis
Production Possibilities Curve for Xanadu
M
N
P
Q
(c) If the two countries specialize and trade with each other, which country will import cars? Explain why.
Car
s
Tractors10 40
20
30 Production Possibilities Curve forAtlantis
Production Possibilities Curve for Xanadu
M
N
P
Q
(d) If the terms of trade are such that one car can be exchanged for one tractor, explain how Atlantis will benefit from such trade.
Car
s
Tractors10 40
20
30 Production Possibilities Curve forAtlantis
Production Possibilities Curve for Xanadu
M
N
P
Q
Assume that two countries, Atlantis and Xanadu, have equal amounts of resources. Atlantis can produce 30 cars or 10 tractors or any combination, as shown by the line MN in the figure above. Xanadu can produce 20 cars or 40 tractors or any combination, as shown by the line PQ in the figure above.
Car
s
Tractors10 40
20
30 Production Possibilities Curve forAtlantis
Production Possibilities Curve for Xanadu
M
N
P
Q
(a) Which country has an absolute advantage in the production of tractors? Explain how you determined your answer.Xanadu has the absolute advantage in tractors.It can produce more tractors than Atlantis.
Car
s
Tractors10 40
20
30 Production Possibilities Curve forAtlantis
Production Possibilities Curve for Xanadu
M
N
P
Q
(b) Which country has a comparative advantage in the production of cars? Using the concept of opportunity costs, explain how you determine your answer.
Atlantis1car = __ trac.1 trac = __ cars
Xanadu1 car = __ trac.1 trac = __ cars
1/33
21/2
Atlantis has the comparative advantage in cars.It’s marginal opportunity cost of producing a caris less than Xanadu’s (1/3 trac. compared to ½).
Car
s
Tractors10 40
20
30 Production Possibilities Curve forAtlantis
Production Possibilities Curve for Xanadu
M
N
P
Q
(c) If the two countries specialize and trade with each other, which country will import cars? Explain why.Xanadu should import cars. The opportunity cost of producing a car in Xanadu is too high. Itwould have to give up the production of 2 tractors.
Atlantis1car = __ trac.1 trac = __ cars
Xanadu1 car = __ trac.1 trac = __ cars
1/33
21/2
Car
s
Tractors10 40
20
30 Production Possibilities Curve forAtlantis
Production Possibilities Curve for Xanadu
M
N
P
Q
(d) If the terms of trade are such that one car can be exchanged for one tractor, explain how Atlantis will benefit from such trade.
Atlantis1car = __ trac.1 trac = __ cars
Xanadu1 car = __ trac.1 trac = __ cars
1/33
21/2
If Atlantis were to produce its own tractors,it would have to give up the production of 3 cars. Bytrading 1 tractor for 1 car, this is a good terms of tradebecause Atlantis gets to a point outside its own PP curve.
Mars Venus
Food Clothing Food Clothing
0 30 2 24 4 18 5 12* 8 610 0
0 40 4 32 8 24*12 1616 820 0
Mars Venus
Food Clothing Food Clothing
0 30 2 24 4 18 5 12* 8 610 0
0 40 4 32 8 24*12 1616 820 0
Constant or Increasing?
Mars Venus
Food Clothing Food Clothing
0 30 2 24 4 18 5 12* 8 610 0
0 40 4 32 8 24*12 1616 820 0
Absolute Advantage?
Mars Venus
Food Clothing Food Clothing
0 30 2 24 4 18 5 12* 8 610 0
0 40 4 32 8 24*12 1616 820 0
Comparative Advantage?
