Class Twenty-two

Self sufficiency is the road to poverty.
                                              Rochester                    Cornell
                          Cameras            5                                4
                                         1cam=2wine           1cam=3/4wine
                                         P-cam =2wine           P-cam=3/4wine
                          Wine                 10                              3
                                         1wine=.5cameras         1 wine=4/3cameras
                                         P-wine=.5cameras        P-wine=4/3cameras
Rochester has a lower opportunity cost of wine compared to Cornell. THUS, Rochester has a comparative advantage in making wine over Cornell while Cornell has an absolute advantage.

Cornell has a lower opportunity cost of cameras compared to Rochester. THUS, Cornell has a comparative advantage in making cameras over Rochester.

No body can have a comparative advantage in producing everything. Comparative advantage is how good are you at producing one thing compared to producing another.

Then Cornell proposes the following proposal:

                                               Rochester                    Cornell

                          Cameras             0                                 4

                                  

                          Wine                 10                                0

                                         P-cameras=1wine       P-wine=1camera

Rochester decides to trade 3 wine to Cornell and Cornell decides to trade 3 cameras back to Rochester.

After Trade:

                                               Rochester                    Cornell

                          Cameras             3                                 1

                                  

                          Wine                  7                                 3

Both Rochester and Cornell are operating outside their PPF. Society is now richer because for the same resources you get more outputs. By definition, trade is sustainable. 

What countries produce is a function of their relative productivity (prices across countries don't matter, what matters for trade is relative price differences within a country).