The exhibit gives a picture of Roadway’s comparative advantage in trucks and Seaside’s comparative advantage in boats Specialization and the Gains from Trade We have so far assumed that no trade occurs between Roadway and Seaside Now let us assume that trade opens up The fact that the opportunity costs differ between the two countries suggests the possibility for mutually advantageous trade The opportunities created by trade will induce a greater degree of specialization in both countries, specialization that reflects comparative advantage Trade and Specialization Before trade, truck producers in Roadway could exchange a truck for half a boat In Seaside, however, a truck could be exchanged for five boats Once trade opens between the two countries, truck producers in Roadway will rush to export trucks to Seaside Boat producers in Seaside enjoy a similar bonanza Before trade, one of their boats could be exchanged for one-fifth of a truck By shipping their boats to Roadway, they can get two trucks for each boat Boat producers in Seaside will rush to export boats to Roadway Once trade between Roadway and Seaside begins, the terms of trade, the rate at which a country can trade domestic products for imported products, will seek market equilibrium The final terms of trade will be somewhere between one-half boats for one truck found in Roadway and five boats for one truck in Seaside Suppose the terms of trade are one boat Attributed to Libby Rittenberg and Timothy Tregarthen Saylor URL: http://www.saylor.org/books/ Saylor.org 894