Suppose that there are 7 million workers in Mexico and that each of these workers can produce either 2 cars or 50 bushels of wheat in a year.

The opportunity cost of producing a car in Mexico is bushels of wheat, and the opportunity cost of producing a bushel of wheat in Mexico is cars.

Use the blue line (circle symbol) to draw Mexico's production possibilities frontier (PPF) on the following graph. Then use the black point (plus symbol) to indicate the consumption bundle Mexico can achieve without trade if it chooses to consume 6 million cars.

PPF

Without Trade

With Trade

GRAPH

Cars (millions)

Wheat (millions of bushels)

Now suppose that the United States offers to sell 10 million cars to Mexico in exchange for 150 million bushels of wheat.

On the previous graph, use the grey point (star symbol) to indicate the consumption bundle Mexico can achieve with trade if it continues to consume 200 million bushels of wheat.

Mexico accept the deal the United States proposes.