Authors libby rittenberg 88
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countries affect the quantities of goods available to people? What
determines the rate at which production will increase over time? What is
the role of economic freedom in the economy? In this section we explore
applications of the model to questions of international trade, economic
growth, and the choice of an economic system.
Comparative Advantage and International Trade
One of the most important implications of the concepts of comparative
advantage and the production possibilities curve relates to international
trade. We can think of different nations as being equivalent to Christie
Ryder’s plants. Each will have a comparative advantage in certain
activities, and efficient world production requires that each nation
specialize in those activities in which it has a comparative advantage. A
failure to allocate resources in this way means that world production falls
inside the production possibilities curve; more of each good could be
produced by relying on comparative advantage.
If nations specialize, then they must rely on each other. They will sell the
goods in which they specialize and purchase other goods from other
nations. Suppose, for example, that the world consists of two continents
that can each produce two goods: South America and Europe can produce
food and computers. Suppose they can produce the two goods according to
the tables in Panels (a) and (b) of Figure 2.12 "Production Possibilities
Curves and Trade". We have simplified this example by assuming that each
continent has a linear production possibilities curve; the curves are plotted
below the tables in Panels (a) and (b). Each continent has a separate
production possibilities curve; the two have been combined to illustrate a
world production possibilities curve in Panel (c) of the exhibit.
Attributed to Libby Rittenberg and Timothy Tregarthen
Saylor URL: />
Saylor.org
88
