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This diagram uses production possibility curves (PPCs) for two countries—Grania and Chipia—to illustrate absolute and comparative advantage and the potential gains from trade.
Grania PPC (red): Shows Grania’s production possibilities; steeper, indicating comparative advantage in grain.
Chipia PPC (blue): Shows Chipia’s production possibilities; flatter, indicating comparative advantage in computer chips.
Vertical axis measures grain output.
Horizontal axis measures computer chip output.
Bulleted notes identify each country’s comparative and absolute advantages.
Chipia’s PPC lies outside Grania’s PPC, indicating that Chipia has an absolute advantage in producing both grain and computer chips (it can produce more of each good with the same resources).
The steeper slope of Grania’s PPC means it has a lower opportunity cost in grain production, giving Grania a comparative advantage in grain.
The flatter slope of Chipia’s PPC indicates a lower opportunity cost in chip production, giving Chipia a comparative advantage in computer chips.
By specializing according to comparative advantage—Grania in grain and Chipia in chips—and trading, both countries can consume beyond their individual PPCs.
This model underpins the principle that even if a country is less efficient at producing all goods (no absolute advantage), it can still gain from trade by specializing in goods where it has a lower opportunity cost.
Explore other diagrams from the same unit to deepen your understanding
This diagram shows how a country exports goods under free trade when the world price is higher than the domestic equilibrium price.
This diagram illustrates how a country imports goods under free trade when the world price is lower than the domestic equilibrium price.
This diagram shows the effects of a tariff imposed on imported goods. A tariff raises the price of imports, protecting domestic producers but creating welfare losses.
This diagram illustrates the effects of an import quota, a trade protection measure that limits the quantity of a good that can be imported. Quotas raise domestic prices, benefit local producers, and reduce consumer surplus.
This diagram illustrates the effects of a production subsidy, where the government supports domestic producers to lower their costs and increase output. It is a form of protectionism without raising consumer prices directly.
This diagram shows how an export subsidy raises the domestic price above the world price, encouraging producers to export more while reducing consumer welfare and creating deadweight losses.
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