5 Steps to a 5 AP Macroeconomics 2019

162 ❯ Step 4. Review the Knowledge You Need to Score High

Gains from Trade

After each state specializes, suppose that each decides to keep half of its production and

send the other half to the other state. See Figure 12.2.

Oregon:

Produce 10 timbers and send 5 to Indiana in exchange for 9 soybeans. Cost of a soybean

before trade was 1 timber. Now we’re getting 9 soybeans, but only giving up 5 timbers. The

cost of giving up 1 timber is now is 5/9, which is less than 1 timber. Great deal!

Indiana:

Produce 18 soybeans, and send 9 to Oregon in exchange for 5 timbers. Cost of a timber

before trade was 3 soybeans. Now we’re getting 5 timbers and only giving up 9 soybeans.

The cost now is 9/5, which is less than 3 soybeans. Great deal!

Another look at the production possibility curves after the trade shows that each state

has actually moved beyond the constraints of their technology and resources.

soybeans soybeans

timber timber

10

10

18

6

consuming

5 of each

consuming

9 soybeans,

3 timber

specialize

specialize

Oregon

without

trade

Indiana

without

trade

Figure 12.1

Figure 12.2

soybeans soybeans

timber timber

10

10

18

6

consuming

5 timber,

9 soybeans

consuming

9 soybeans,

5 timber

Indiana

with trade

Oregon

with trade

KEY IDEA