... buy from the cheapest producer, increasing output, and we will end up outside our own production possibility curve. Absolute Advantage Example - - UK has absolute advantage in wheat. - Australia has absolute advantage in cars. Suppose UK and Australia have 100 man hours. Wheat Cars Opp Cost UK 600 OR 200 1W:?C AUS 100 OR 600 1W:6C Specialise UK 600 0 AUS 0 600 Now we trade at an exchange rate lying between opportunity costs, so 1W:2C At 1W:2C we specialise and trade - Wheat Cars UK 400 400 AUS 200 200 Comparative Advantage Example - - UK has absolute advantage in both wheat and cars but has a comparative advantage in cars. - Australia has no absolute advantage but has a comparative advantage in wheat Wheat Cars Opp Cost UK 60 OR 60 1W:1C AUS 50 OR 10 5W:1C - so UK will specialise in cars and Australia will specialise in wheat. Specialisation UK 0 120 AUS 100 0 - Trade at 1C:2W Trade UK 40 100 AUS 60 20 In both examples the UK and Australia ...

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