has a slope of −1 Roadside will produce more trucks (and fewer boats) Seaside moves along its production possibilities curve to point B′, at which the slope equals −1 Seaside will produce more boats (and fewer trucks) Trade leads each country in the direction of producing more of the good in which it has a comparative advantage Similarly, Seaside will specialize more in boat production As shown in Panel (b) of Figure 17.5 "International Trade Induces Greater Specialization", producers will shift resources out of truck production and into boat production until they reach the point on their production possibilities curve at which the terms of trade equal the opportunity cost of producing boats This occurs at point B′; Seaside produces 3,000 trucks and 6,000 boats per year We see that trade between the two countries causes each country to specialize in the good in which it has a comparative advantage Roadway produces more trucks, and Seaside produces more boats The specialization is not, however, complete The law of increasing opportunity cost means that, as an economy moves along its production possibilities curve, the cost of additional units rises An economy with a comparative advantage in a particular good will expand its production of that good only up to the point where its opportunity cost equals the terms of trade As a result of trade, Roadway now produces more trucks and fewer boats Seaside produces more boats and fewer trucks Through exchange, however, both countries are likely to end up consuming more of both goods Figure 17.6 "The Mutual Benefits of Trade" shows one such possibility Suppose Roadway ships 2,500 trucks per year to Seaside in exchange for Attributed to Libby Rittenberg and Timothy Tregarthen Saylor URL: http://www.saylor.org/books/ Saylor.org 896