DragIT - Comparative advantage theory
The following diagram shows a production possibility curve. To keep the analysis simple, we assume that the country produces just two goods, wheat and computers.
Initially assume that production and consumption are at point P: the country produces and consumes 40 million tonnes of wheat and 60 million computers per year.
Now assume that trade occurs and that 1 tonne of wheat is exchanged for 1 computer. Assume also, that production remains at point P. By trading internationally, the country can consume anywhere along the straight red line linking 100 millions of tonnes of wheat with 100 million computers.
Drag the bullet at point P to show some of the alternative combinations of the two goods that can be consumed.
Drag the bullet to the top of the red line.
Imports and exports
Assuming that the country consumes at the point you have dragged the curve to (i.e. 100 million tonnes or wheat per year and no computers), how much will be imported and exported?
Now drag the bullet to a consumption point that represents 20 million tonnes of wheat being exported and 20 million computers being imported.