Suppose that Portugal and Switzerland both produce beer and stained glass. Portugal's opportunity cost of producing a pane of stained glass is 4 barrels of beer while Switzerland's opportunity cost of producing a pane of stained glass is 10 barrels of beer.

When a country has a comparative advantage in the production of a good, it means that it can produce this good at a lower opportunity cost than its trading partner. Then the country will specialize in the production of this good and trade it for other goods. The following graphs show the production possibilities frontiers (PPFs) for Freedonia and Lamponia. Both countries produce potatoes and tea, each initially (i.e., before specialization and trade) producing 6 million pounds of potatoes and 3 million pounds of tea, as indicated by the grey stars marked with the letter A.   Suppose that Freedonia and Lamponia agree to trade. Each country focuses its resources on producing only the good in which it has a comparative advantage. The countries decide to exchange 2 million pounds of potatoes for 2 million pounds of tea. This ratio of goods is known as the price of trade between Freedonia and Lamponia. The following graph shows the same PPF for Freedonia as before, as well as its…

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Suppose that Ontario and Vermont each produce two goods, maple syrup (M) and hockey sticks (H).  The quantities of each good that can be produced by each region in a day are given below: ONTARIO      VERMONT               GALLONS OF MAPLE SYRUP/DAY                400                 1200               HOCKEY STICKS/DAY                                      200                   300   Which region has an absolute advantage in maple syrup production?  Which                  region has an absolute advantage in hockey stick production? Find the opportunity costs of each good for both Ontario and Vermont.                         c.  Should Ontario and Vermont specialize and trade?  Which good should be        produced by Ontario?  Vermont?                                                      What are the terms of trade? Use PPCs and CPCs to show that each would be       better off through specialization and trade.               Of what principle does this question provide an example?