1. Production Possibilities, Absolute & Comparative Advantage

2. Production Possibilities Curve

3. Production Possibilities Curve
Any point on the curve represents an efficient use of resources
Any point inside the curve represents an inefficient use of resources (unemployment)
Any point outside the curve is not possible
The curve can shift inward or outward when there are changes in costs or productive capacity

5. Absolute & Comparative Advantage

6. Why Nations Trade
Nations have different natural, human and capital resources
Nations are not equally efficient at producing the goods and services demanded by their residents
Production of any good has an opportunity cost
Nations should specialize in production of goods with the lowest opportunity costs

7. Assumptions Two nations Two goods
Producers in both nations can produce both goods
Consumers in both nations want both goods
Resources are perfectly interchangeable between production of both goods

8. Absolute Advantage
Given equal resources, one nation (or individual) can produce more of a good than another nation (or individual).
But even if one country has absolute advantages in the production of both goods, specialization and trade will usually benefit both countries.

9. Comparative Advantage
One nation (or individual) can produce a good at a lower opportunity cost than another nation (or individual).
Examples of Comparative Advantage:
Economics professor and secretary
Auto mechanic and doctor
Accountant and painter

10. Terms of Trade Good terms of trade
To benefit both nations, the terms must fall between the two nations’ opportunity costs