## Calculating the Price Using a Production Possibilities Curve And Understanding the Trading Relationship

The Production Possibilities Curves (PPC) for countries A and B are shown in the following diagram.

## Price Calculations for Country A

The price of shoes for country A:

100 pairs of shoes = 300 loaves of bread, or 1 pair of shoes = 3 loaves of bread.

The diagram shows that 300 loaves of bread can be exchanged for 100 pairs of shoes, which can be reduced to a 3 to 1 relationship. This is the price of shoes.

The price of bread for country A:

300 loaves of bread = 100 pairs of shoes, or 3 loaves of bread = 1 pair of shoes, or 1 loaf of bread = 1/3 (one third) of a pair of shoes.

In country A, 300 loaves of bread can be exchanged for 100 pairs of shoes, or 1 loaf of bread can be exchanged for 1/3 of a pair of shoes. This is the actual price of the items.

## Price Calculations for Country B

50 pairs of shoes = 250 loaves of bread, or 1 pair of shoes = 5 loaves of bread.

In Country B, 50 pairs of shoes can be exchanged for 250 loaves of bread, or 1 pair of shoes can be exchanged for 5 loaves of bread. This is the actual price for the items.

The price of bread for country B:

250 loaves of bread = 50 pairs of shoes, or 5 loaves of bread = 1 pair of shoes, or1 loaf of bread = 1/5 (one-fifth) pair of shoes. In Country B, 250 loaves of bread can be exchanged for 50 pairs of shoes, or 1 loaf of bread can be exchanged for 1/5 of a pair of shoes.

This is the actual price for the items.

## Understanding the Trading Relationship Between Two Countries

The example shows that if two countries trade between themselves and each produces the same two products, then if country A has an advantage in producing one item, country B must have an advantage in manufacturing the second item. If one country had an advantage in producing both items, then a trading relationship wouldn’t exist.