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Chapter 6 Trade
Supply and demand offers one approach to understanding trade, and it represents the most important and powerful concept in the toolbox of economists. However, for some issues, especially those of international trade, another related tool is very useful: the production possibilities frontier. Analysis using the production possibilities frontier was made famous by the “guns and butter” discussions of World War II. From an economic perspective, there is a trade-off between guns and butter—if a society wants more guns, it must give up something, and one thing to give up is butter. While the notion of getting more guns might lead to less butter often seems mysterious, butter is, after all, made with cows, and indirectly with land and hay. But the manufacture of butter also involves steel containers, tractors to turn the soil, transportation equipment, and labor, all of which either can be directly used (steel, labor) or require inputs that could be used (tractors, transportation) to manufacture guns. From a production standpoint, more guns entail less butter (or other things).