Economics Part A

Trade Between Countries Using the Barter System

Example:

Country A and Country B each produce only two products: Bread and shoes. Both use the barter system. Prices for each of the goods are shown in the diagram.The two countries trade with each other. Assuming that the residents of each of the countries always look for the best prices for the products that they buy, then the following scenario occurs:

  • Shoes will only be purchased in Country A (where the price of a pair of shoes is three loaves of bread), but not in Country B, where five loaves of bread are needed to buy one pair of shoes.
  • Bread will be bought only in County B (where the price of a pair of shoes is five loaves of bread), but not in Country A, where the price of a pair of shoes is three loaves of bread.\

Calculating the Price of Bread and Shoes Using a Production Possibility Curve

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

Trade Between Countries Using the Barter System553Trade Between Countries Using the Barter System