countries affect the quantities of goods available to people? What determines the rate at which production will increase over time? What is the role of economic freedom in the economy? In this section we explore applications of the model to questions of international trade, economic growth, and the choice of an economic system Comparative Advantage and International Trade One of the most important implications of the concepts of comparative advantage and the production possibilities curve relates to international trade We can think of different nations as being equivalent to Christie Ryder’s plants Each will have a comparative advantage in certain activities, and efficient world production requires that each nation specialize in those activities in which it has a comparative advantage A failure to allocate resources in this way means that world production falls inside the production possibilities curve; more of each good could be produced by relying on comparative advantage If nations specialize, then they must rely on each other They will sell the goods in which they specialize and purchase other goods from other nations Suppose, for example, that the world consists of two continents that can each produce two goods: South America and Europe can produce food and computers Suppose they can produce the two goods according to the tables in Panels (a) and (b) of Figure 2.12 "Production Possibilities Curves and Trade" We have simplified this example by assuming that each continent has a linear production possibilities curve; the curves are plotted below the tables in Panels (a) and (b) Each continent has a separate production possibilities curve; the two have been combined to illustrate a world production possibilities curve in Panel (c) of the exhibit Attributed to Libby Rittenberg and Timothy Tregarthen Saylor URL: http://www.saylor.org/books/ Saylor.org 88