Principles of Economics/Trade

Differences between entities


Different entities will have different possibility curves, which allow for trade to be done. In this case, each society might decide to produce at these two indicated positions because their output is relatively higher for those positions. However, should they choose to have the same output position, that position will be significantly lower than their optimal positions. This is the case for entities that do not trade.

Trade


Trade between these two entities can be done after they each produce at their optimal (depending on where society wants to allot its resources) and then exchanging goods at a fair ratio. The result of fair exchange is the pink line connecting them. The result is a higher possibility for each society through trade than each can reach without, as shown by the comparison between the center gray point and the pink point.

Specialization


These different entities can then take actions to specialize in one field. Specialization causes the PPF to take the concave outward form as the graph shows, because choosing to produce more of one good allows one to produce far more combined goods.

Trade with specialization


Specialization increases the benefits from trade. In these graphs, the benefit is the horizontal and vertical increase from the center gray point to the pink point. The specialized PPF curves are more separate, allowing the societies (or entities in general) to produce at more different positions.