Gains from Exchange

Gains from Exchange

North Island

This simplified example illustrates the gains from voluntary exchange or trade:

North Island is a good place to make crepes. It is not impossible to make Nuttella ™ , but the geography makes it very difficult, so most people have to eat just crepes every day.

South Island

South Island is a good place to make Nutella. It is not impossible to make crepes, but if people in the South used all their labor and capital to produce one food, they could make much more Nutella than crepes.

The opportunity cost of making crepes is the number of jars of Nutella they could have made with those same resources.

The South has a comparative advantage in making Nutella over making crepes. Therefore, most people in the South can only eat Nutella.

 

 

Each island can increase its total output by specializing, however they would prefer to consume these two foods in a more equal proportion. They will both be better off if they trade.

Crepes AND Nutella

 

 

 

 

 

If you are reading this on a computer, you are experiencing the gains from trade.  If you did not build this computer yourself from what you could hunt or gather in nature by yourself, you  traded for it.

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