PP Presentation
Gains from Trade
The production possibility frontier describes the limits of what a country can produce.
It does not describe the limits of what a country can consume.
As trade takes place production patterns will change and prices will adjust accordingly. In the previous example, the price of cars would fall in Iowa and increase in Japan. The price of soybeans would increase in Iowa and fall in Japan. This process continues to the point where Iowa's import demand for cars equals Japan's export supply of cars.
Price
Quantity of Cars
Japan's Export Supply
Iowa's Import
Demand
(Tons of Soybeans)