## DragIT - Comparative advantage theory

Letīs Do Some Economics!

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.

1

##### 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?

 a) 100 million tonnes of wheat exported; No computers imported b) 40 million tonnes of wheat exported; 60 million computers imported c) 40 million tonnes of wheat imported; 60 million computers exported d) 60 million tonnes of wheat imported; 60 million computers exported e) 40 million tonnes of wheat imported; 40 million computers exported Yes, that's correct. With 100 million tonnes of wheat consumed and only 40 million tonnes produced, 60 million tonnes must be imported. With 60 million computers being produced and none being purchased domestically, they will all be exported. With an exchange ratio of 1 tonne of wheat for 1 computer, the 60 million computers exported will earn enough for 60 million tonnes of wheat to be imported.No, that's not right. With 100 million tonnes of wheat consumed and only 40 million tonnes produced, 60 million tonnes must be imported. With 60 million computers being produced and none being purchased domestically, they will all be exported. With an exchange ratio of 1 tonne of wheat for 1 computer, the 60 million computers exported will earn enough for 60 million tonnes of wheat to be imported.Your answer has been saved.

Now drag the bullet to a consumption point that represents 20 million tonnes of wheat being exported and 20 million computers being imported.

2

##### Consumption level

How many tonnes of wheat and computers will be consumed at this point?

This should be at a point representing 20 million tonnes of wheat and 80 million computers being consumed.