Kenneth R. Szulczyk
tariffs and trade barriers to allow money, products, and services to cross borders. Finally, the
Law of Comparative Advantage still works for a large country that can produce everything.
Economists use a production possibilities curve (PPC) to show how two countries benefit
from free trade. A PPC represents graphically a country’s maximum production level for two
goods given its endowment of resources. Resources include labor, machines, equipment, land,
and entrepreneurs. The PPC has three assumptions:
Both countries produce at full employment, which means a country produces on the
boundary of the production possibilities curve. Thus, society employs its entire labor force,
and entrepreneurs use all their machines, equipment, and land to produce goods and
services. The PPCs are straight lines. Consequently, an industry experiences no losses when
entrepreneurs move resources from industry to another. Although this analysis works with
curved PPCs, the straight-line PPCs simplify the analysis. Two countries, the United States and Mexico, produce only tomatoes and cars.We begin the analysis with no trade between Mexico and the United States. United States
produces 50 units while Mexico produces 60 if they shift the entire country’s resources to
produce tomatoes. If entrepreneurs shift all the resources into car manufacturing, then the United
States produces 100 cars while Mexico produces 30. The intercepts indicate the maximum
production levels for the PPC curves, which we show in Figure 2.
Figure 2. The Production Possibilities Curves for Mexico and the United States
We set each country’s production level at the half-way point. Thus, the United States
produces 25 tomatoes and 50 cars while Mexico produces 30 tomatoes and 15 cars.
Consequently, the total production for both countries equals 55 tomatoes and 65 cars.