Principles of Macroeconomics / Unit 17 MAC 1608 worked example, 60 to 90 seconds
The Range of Beneficial Ratios
The idea
Find the trading ratios that leave both countries better off, then show a consumption point beyond a frontier. The range is bounded by the two opportunity costs: any ratio strictly between them beats what each country could do alone. Outside that range, one country would rather not trade.
In practice
Northland's cost is two grain per cloth and Southland's is one grain per cloth, so beneficial ratios lie strictly between one and two grain per cloth. Take one and a half. Southland produces 800 cloth, keeps 400 and trades 400 cloth for 600 grain. Northland produces 2,000 grain, keeps 1,400 and trades 600 grain for 400 cloth. Northland now consumes 400 cloth and 1,400 grain, against 300 and 1,400 before: better by 100 cloth. Southland consumes 400 cloth and 600 grain, against 400 and 400 before: better by 200 grain.
Where people slip
Both ends up outside its own frontier, which no amount of domestic reallocation could achieve. Note also that the gains split unevenly, and where in the range the ratio settles decides the split. A ratio at the very edge of the range leaves almost all the gain with one country, which is what trade negotiations are actually about.
Your place on the trail
Every lesson rests on earlier ones and opens later ones. Tap any to jump.
Something wrong in this lesson? Flag it · Sources for Principles of Macroeconomics