Suppose that both Britain and America produce and consume two goods, manufactured woolen cloth and corn. The production possibility frontiers ( PPFs ) in the two countries are shown below. (In Introductory Economics, PPFs are often shown as curved lines, bowing out from the origin, representing the increasing marginal opportunity cost of converting from one output to the other. Here the PPFs are linear to make the different marginal rates of transformation in the two countries clearer.)

1. A country is said to have a comparative advantage in producing a good if it is relatively more efficient in producing that good. Which country has a comparative advantage in producing which good? How do you know?

2. The marginal rate of transformation ( MRT ) between two goods is the rate at which production of one good can be shifted to production of the other along the PPF (i.e., assuming that all resources remain fully employed). What is the MRT of woolens into corn in each country?

3. Can you suggest a way that trade between the two economies could clearly make consumers in both economies better off? A trade is called Pareto Optimal or Pareto Efficient if it leaves everyone at least as well off, and no one worse off than before the trade. Show your answer on the graph. Why might countries ever want to prevent their citizens from engaging in trade?