production of the good in which it has a comparative advantage. In each
part of the figure, the slope of the upper, green line shows the relative
prices at which trade takes place. Production occurs in each country at
point S (for specialization); Canada produces only wheat, and the EU
produces only cloth.
Consumption possibilities for each country are now given by the upper,
green line that passes through point S. Consumption possibilities are
increased in both countries; consumption may occur at some point, such
as d, that involves a combination of wheat and cloth that was not
attainable in the absence of trade.
Extensions in Theory 32-1
The Gains from Trade More Generally
Examining the gains from trade is relatively easy in the case
where each country’s production possibilities boundary is a
straight line. What happens in the more realistic case where the
production possibilities boundary is concave? As this box
shows, the same basic principles of the gains from trade apply
to this more complex case.
International trade leads to an expansion of the set of goods
that can be consumed in the economy in two ways:
1. By allowing the bundle of goods consumed to differ from the
bundle produced
2. By permitting a profitable change in the pattern of
production