How does trade increase wealth beyond shifting resources?
Example :
Time to do your works
Mike Rich
Weeding 80 minutes 120 minutes
Mowing 40 minutes 120 minutes
Total amount 120 minutes 240 minutes
Now Rich offers to weed 3/4 of Mike's driveway if Mike mows Rich's yard
Mike's working time: 40+40+0.25*80=100 minutes
Rich's working time: 0+120+120*0.75=210 minutes
Both people are better off and the poor people can actually benefit more from the trade.
Production Possibility Frontiers (PPF)
All possible combinations of goods that a person/nation can produce given its resources, knowledge and technology.
Properties of PPFs
(1)All points on and within the curve are achievable.
(2)Comparing PPFs across people tells us who's better at producing a certain stuff
For example: Rizzo can produce 100 dolls in an hour while Rachel can produce 120 in 60 minutes, thus Rachel has absolute advantage in producing dolls over Rizzo.
(3)All points outside the PPFs are not achievable.
(4)Points on PPFs are productively efficient
The difference between productively efficient and economically efficient
Economic efficiency is not just producing things at lowest cost,but producing things that people want most.
So to get economic efficiency, getting to productive efficiency is a necessary condition. Economic efficiency is a certain point on the PPFs, different from person to person, nation to nation.
(5)Slope has meaning: it represents the trade-off if another good.
(6)Change is slope has meaning: it shows the law of diminishing return/increasing opportunity cost. When the slope is greater in absolute value, it means that you have to sacrifice more alternative good to get marginal good you want.
(7)Economic growth can change the curve
three factors: resources, technology and trade
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