Okay. So let's use these production possibilities curves to think about what happens when countries are not trading and how it changes when they begin to trade. Okay, so the first thing we're going to assume besides the fact that there are two countries, which are Ghana and South Korea. And there are two products, which are steel and cocoa, which both countries are capable of producing. Okay. We're going to assume these production possibilities for those two countries. Ghana, one worker in Ghana every year could produce 10 units of steel or 20 units of cocoa. All right. If they were used to their maximum, they could produce one or the other. In South Korea, one worker in a given year could produce 40 units of steel or 10 units of cocoa, okay? And let's assume additionally, that each country has 10 million workers, okay? So there are the parameters of what we're going to do. Each country has 10 million workers so that means that if the workers produced only steel in Ghana, if they produced only steel, Ghana could have a 100 million steel, okay? And we'll put the mark right here. Okay. So Ghana, if they use their workers only for steel and they're 10 million of them, they could have a maximum of 100 million steel a year. Or, if they use their workers all for cocoa and of course, there are 10 million of them, there could be 200 million units of cocoa produced a year. So we have these points that mark the limits of the production possibility frontier for Ghana, okay? Like we said, they can produce anything along that line, but they cannot produce outside it, okay? Now, if we assume different production possibilities as we have for South Korea and 10 million workers, if we put all 10 million of our workers into steel and they only produce steel, we could have an output of 400 million steel per year, okay? Or, if they only produced cocoa and we put all of our workers into the cocoa, we could have an output of a 100 million cocoa a year. So the production possibility frontier for South Korea would look something like this. So you see the difference. Obviously, it's clear, that South Korea has an advantage in steel production and Ghana has an advantage in cocoa production, I should have put the 100 a little closer down here. But anyway, we know what we're talking about. So we can see there are different production possibilities frontiers. Let's assume that these countries don't have any trade. They're not trading, okay? And let's say that each one of them likes both goods, okay? So they decide to spend half of their available workers producing steel and half of their available workers producing cocoa, okay? So we would have a 100 cocoa being produced, 50 steel being produced, and they would produce what we're going to call point A. That's Autarky, that means no trade, okay? Let's assume South Korea is the same. Without trade, without any possibility of buying from other countries, they'd like to have some cocoa and some steel. So they divide their workers between the two goods and they produce 200 steel and they produce 50 cocoa, okay? So this is their point A, we're going to call it A prime because it's South Korea, okay? So this is what the countries are doing. Now, if we add up, how much they're actually able to produce and consume of the different goods, we've got 50 plus 200, we've got 250 steel in the world, okay? And we've got 100 plus 50, we've got 150 cocoa in the world, right? With no trade. So this is our starting point. Now, let's assume that these two countries decide that they're going to trade, all right? If you trade the beauty of trade is you can specialize. You can put all of your workers into producing the good that you produce most efficiently, okay? So in this particular case, Ghana would say, "Well, actually I'm better at cocoa than steel," so I'm going to produce only cocoa. Okay. Well, let this be point B. Ghana decides to produce 200 cocoa and no steel. Now, they couldn't do this before because they wanted both. They needed some steel. But once you have trade, you can have specialization. The country can use its resources in the good that didn't produces most efficiently and forget about producing the other and allow another country who's more efficient to produce it. Now, we saw that South Korea is better at steel. So South Korea, let's say that with trade, they decide they want to produce only steel and no cocoa whatsoever because they're not very good at it, Ghana is much better. So they would be up here at B prime, which is 400 steel and no cocoa whatsoever. Let's assume as well that there's a price in the world, now we can move these prices around. But there's a price in the world which is that two cocoa that, excuse me, two steel will exchange for one cocoa. So their price is two for one, okay? So Ghana says, "All right, I am going to sell 100 cocoa and I'm going to trade it for steel." Now their price is two for one, okay? So for my 100 cocoa, I can get 200 steel. So I go up here, you see. We're going to call this point C, where Ghana has given up 100 cocoa and bought with it 200 steel, okay? South Korea, on the other hand, says, "Okay, I'm going to sell 200 steel because that's what Ghana wants and I am going to exchange it for 100 cocoa because that's what it will buy." And so South Korea gives up 200 steel, buys a 100 cocoa with it, and they get to point C prime. What I want you to see here and we're not going to go deeply into the numbers or anything, but I want you to see two things. One is that with trade, we have managed to increase the output of the world. With trade and no trade was the A and A prime points. With trade, which are the B points, total world output of cocoa was 200. And total world output of steel was 400. You can already see the gains, okay? You can see that the world has 150 more steel and 50 more cocoa than it did without trade. Same resources, same production possibilities curves, not breaking the limits of our production possibilities. But then, the very interesting thing here is, when these countries specialize and trade, they consume point C and point C prime off of their production possibilities curve. This is what I call the magic of trade. Without trade, we were constrained to only be able to produce and consume what is along the limits of these curves. Once we have trade and we can specialize Ghana in cocoa, South Korea in steel. The countries trade and they escape the constraints of their production possibility frontier. Here, we find the gains from trade.
