International trade is based upon the principle that all countries gain from trade

International trade is based upon the principle that all countries gain from trade.

Maximum Production Possibilities for the US and Mexico:

	US	Mexico
computers	50	10
TVs	50	40

1 year of labor by one worker in U.S. can either produce 50 computers or 50 TVs
1 year of labor in Mexico can either produce 10 computers or 40 TVs

But we need to judge by relative rather than absolute terms!

Each country’s climate, labor force, and geography make it a relatively efficient producer of some goods and an inefficient producer of others.
Numbers above are the total amount that can be produced, but does not tell us the COST at which they are produced!

…meaning opportunity cost…

Opportunity Cost of Producing Computers:

US: cost of 1 computer = 1 TV

Mexico: cost of 1 computer = 4 TVs

Opportunity Cost of Producing TVs:

US: cost of 1 TV = 1 computer

Mexico: cost of 1 TV = 1/4 computer

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