Authors libby rittenberg 89
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Figure 2.12 Production Possibilities Curves and Trade
Suppose the world consists of two continents: South America and Europe.
They can each produce two goods: food and computers. In this example, we
assume that each continent has a linear production possibilities curve, as
shown in Panels (a) and (b). South America has a comparative advantage in
food production and Europe has a comparative advantage in computer
production. With free trade, the world can operate on the bowed-out curve
GHI, shown in Panel (c). If the continents refuse to trade, the world will
operate inside its production possibilities curve. If, for example, each
continent were to produce at the midpoint of its production possibilities
curve, the world would produce 300 computers and 300 units of food per
period at point Q. If each continent were to specialize in the good in which it
has a comparative advantage, world production could move to a point such
as H, with more of both goods produced.
The world production possibilities curve assumes that resources are
allocated between computer and food production based on comparative
advantage. Notice that, even with only two economies and the assumption
of linear production possibilities curves for each, the combined curve still
Attributed to Libby Rittenberg and Timothy Tregarthen
Saylor URL: />
Saylor.org
89
