Figure 32-3 The Gains from Trade with Constant Opportunity Costs
gains from trade appears in Extensions in Theory 32-1 , where the
production possibilities boundary is concave (which means that the
opportunity cost for each good is higher when more of that good is being
produced).
International trade leads to specialization in production and increased
consumption possibilities. The bottom, purple lines in parts (i) and (ii)
represent the production possibilities boundaries for Canada and the EU,
respectively. In the absence of any international trade, these also
represent each country’s consumption possibilities.
The difference in the slopes of the production possibilities boundaries
reflects differences in comparative advantage, as shown in Table 32-2
In each part the opportunity cost of increasing production of wheat by the
same amount (measured by the distance ba) is the amount by which the
production of cloth must be reduced (measured by the distance bc). The
relatively steep production possibilities boundary for Canada thus
indicates that the opportunity cost of producing wheat in Canada is less
than that in the EU.
If trade is possible at some relative prices between the two countries’
opportunity costs of production, each country will specialize in the