GAINS

FROM TRADE
Country A Country B World Produc0on
Food Clothing Food Clothing Food Clothing
1. Autarky (No Trade)
Produc'on 2 units 2 units 3 units 1 unit 5 units 3 units
Consump'on 2 units 2 units 3 units 1 unit 5 units 3 units
2. Specializa0on and Trade
Produc'on 0 units 4 units 6 units 0 units 6 units 4 units
Consump'on 3 units 2 units 3 units 2 units 6 units 4 units

Assume that we have two countries Country A and Country B. Each country has a xed
amount of resources, which it allocate to the produc'on of food and clothing, and a xed
technology. Consider the autarky case, wherein each country is self-sucient and does not
engage in trade. In this scenario, each country is able to consume only what it produces.

Country A has a compara've advantage in producing clothing. It needs to give up only 1 unit
of food to produce 1 unit of clothing, whereas Country B must give up 3 units of food to
produce 1 unit of clothing.

Country B has a compara've advantage in producing food. It needs to give up only 1 unit of
clothing to produce 3 units of food, whereas Country A has to give up 1 unit of clothing to
produce 1 unit of food.

Both countries can benet if each country specializes in the product at which it has a
compara've advantage and opens itself up to trade. Country A can specialize in the
produc'on of clothing, while Country B can specialize in the produc'on of food. With
specializa'on, Country A can produce 4 units of clothing, whereas Country B can produce 6

Laza'n & Medrano, 2015

units of food.

If the countries trade, Country A can export 2 units of clothing to Country B in exchange for
3 units of food, while Country B can export 3 units of food to Country A in exchange for 2
units of clothing. Thus, Country A needs only to give up 1 unit of clothing to gain 1.5 units of
food, and Country B can now gain 2 units of clothing from giving up 3 units of food.

Hence, specializa'on and trade enable the two countries to consume beyond their PPFs.