Specialization and win-win from trade

Specialization and trade increase the productivity of both sides'
resources and allow for greater total output than would otherwise be
possible, here is an example:

Assume company A can produce either
15 software products or 6000 servers per year, and
company B can produce either 30  software products or 9000 servers per year. If both of them produce both servers
and software products, then the following might be their productivities:

Company A's production possibilities table (resources for one software can introduce 6000/15=400 servers):

Software products	15	10	9	5	0
Servers	0	2000	24000	4000	6000

Company B's production possibilities table (resources for one software product can introduce 9000/30=300 servers):

Software products	30	20	19	10	0
Servers	0	3000	3300	6000	9000

Assume both companies need and produce both servers and software products themselves without trade, then the following might be their current
productivities:

 Company A:

Software products    9

Servers              2400

Company B: 

Software products    19

Servers              3300

However, if company A only produces software products while company B only
produces servers, and they trade servers and software products with one software product = 350 servers  (average of 300 and 400), then the following
would be the overall output:

Company A: 

Product	Quantity	Comments
Software products	10	Sell 3500 servers to company B to get 10 software products
Servers	2500	Produced 6000, sold 3500 to company B

Company B:

Product	Quantity	Comment
Software products	20	Produced 30, sold 10 to company A
Servers	3500	Sell 10 new features to company A to get 3500 servers

Now you can see it's very obvious that through specialization and
trade, comapny A gets 100 more servers and one more new software
feature, while company B gets one more software product and 200 more servers than they would get if both of them produce both servers and
software products. And this is a win-win!

Posted at 09:09PM Dec 08, 2006 by byuan in Economics  |  Comments[1]