Economics 14

## Lecture 12 - Gains from Trade

In Friday's experiment, both Richlanders and Poorlanders had 20 hours to devote to fishing and baking gread. It takes a Richlander 1 hour to catch a fish and 1 1/2 hours to bake a loaf of bread. For Poorlanders, it takes 3 hours to catch a fish and 2 hours to bake a loaf of bread.

productivity
the number of units produced per hour

In Richland, 1 fish can be produced in an hour and 2/3 of a loaf of bread can be produced per hour. In Poorland, fish productivity is 1/3 per hour and bread productivity is 1/2 per hour. Richland is more productive in producing both fish and bread.

higher productivity in producing that good
ratio of productivity in good A to good B is greater

Richland has an absolute advantage in producing both goods.

 Fish Bread Richland 1/(2/3) = 3/2 (2/3)/1 = 2/3 Poorland (1/3)/(1/2) = 2/3 (1/2)/(1/3) = 3/2

### Production Possibilities Frontier

The production possbilities frontier shows all output combinations that can be produced without wasting resources.

In the absence of trade, you must consume what you produce yourself. That point must lie on your production possbilities frontier. For Richlanders, the best point they can attain without trade is 8 sandwiches; Poorlanders produce and consume 4 sandwiches.