Suppose that real GDP includes just cars and computers. The United States produces 50 cars and 5 computers, while Japan produces 5 cars and 10 computers, and each country has 10 workers and customers who demand both products. The two countries then decide to specialize in the production of just one good based on their comparative advantage and buy the other good from the other country is producing through trade. In the marketplace, the exchange ratio of cars for computers is 1 car = 1 computer. 

Draw the production possibility set and mark the combinations of cars and computers at both the initial (pretrade) equilibrium and the post-trade equilibrium in each country. What to each country's GDP? Can you compute and show graphically the gains from trade for each country?

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Production Possibility Sets Specialization and Gains from Trade Assumptions Two countries US and Japan Two Goods Cars and Computers Constant opportunity cost linear production possibility frontier Exc... View the full answer