 In order to maximize the value of its output, a country must be producing a combination of goods and services that lies on its production possibilities curve  Suppose two countries each produce two goods and their opportunity costs differ If this is the case, there is an opportunity for trade between the two countries that will leave both better off  International trade leads countries to specialize in goods and services in which they have a comparative advantage  The terms of trade determine the extent to which each country will specialize Each will increase production of the good or service in which it has a comparative advantage up to the point where the opportunity cost of producing it equals the terms of trade  Free international trade can increase the availability of all goods and services in all the countries that participate in it Trade allows countries to consume combinations of goods and services they would be unable to produce  While free trade increases the total quantity of goods and services available to each country, there are both winners and losers in the short run TRY IT! Suppose the world consists of two countries, Alpha and Beta Both produce only two goods, computers and washing machines Suppose that Beta is much more populous than Alpha, but because workers in Alpha have more physical and human capital, Alpha is able to produce more of both goods than Beta Specifically, suppose that if Alpha devotes all its factors of production to computers, it is able to produce 10,000 per month, and if it devotes Attributed to Libby Rittenberg and Timothy Tregarthen Saylor URL: http://www.saylor.org/books/ Saylor.org 900