APMacro: Gains from Trade


The gains from trade are the additional amount of commodities a country has after specialization and trade in comparison with the combination before specialization and trade.

Gains from Trade
For example, before specialization and trade, the United States was producing 50 bushels of oranges and 50 bushels of avocados. If, after specialization and trade, the United States wants to continue to have 50 bushels of oranges — and the terms of trade are one bushel of oranges for three bushels of avocados — then the United States could trade 25 bushels of oranges for 75 bushels of avocados. Note that this combination — 50 bushels of oranges and 75 bushels of avocados — puts the United States outside of its production possibilities curve.

Arrows-02-june

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