pre-trade production and consumption possibilities computers (millions) textiles (kilos m) a less...

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Pre-trade production and consumption possibilities Computers (Millions) Textiles (kilos m) 0 200 400 600 800 1000 0 200 400 600 800 1000 a Less developed Country, population 500 Less developed country Developed country Textiles (kilos m ) Computers (m ) Textiles (kilos m ) Computers (m ) a b c d e f 1000 800 600 400 200 0 0 100 200 300 400 500 g h I j k l m 1200 1000 800 600 400 200 0 0 400 800 1200 1600 2000 2400

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Page 1: Pre-trade production and consumption possibilities Computers (Millions) Textiles (kilos m) a Less developed Country, population 500

Pre-trade production and consumption possibilities

Computers (Millions)

Texti

les

(kilo

s m

)

0

200

400

600

800

1000

0 200 400 600 800 1000

a

Less developedCountry, population 500

Less developed country Developed country

Textiles (kilos m)

Computers (m)

Textiles (kilos m)

Computers (m)

a b c d e f

1000 800 600 400 200 0

0 100 200 300 400 500

g h I j k l m

1200 1000 800 600 400 200 0

0 400 800 1200 1600 2000 2400

Page 2: Pre-trade production and consumption possibilities Computers (Millions) Textiles (kilos m) a Less developed Country, population 500

Computers (Millions)

Less developed country Developed country

Textiles (kilos m)

Computers ( millions)

Textiles (kilos m)

Computers ( millions)

a b c d e f

1000 800 600 400 200 0

0 100 200 300 400 500

g h I j k l m

1200 1000 800 600 400 200 0

0 400 800 1200 1600 2000 2400

Texti

les

(kilo

s m

)

0

200

400

600

800

1000

0 200 400 600 800 1000

a

b Less developedcountry

Pre-trade production and consumption possibilities

Page 3: Pre-trade production and consumption possibilities Computers (Millions) Textiles (kilos m) a Less developed Country, population 500

Computers (Millions)

Less developed country Developed country

Textiles (kilos m)

Computers (millions)

Textiles (kilos m)

Computers (millions)

a b c d e f

1000 800 600 400 200 0

0 100 200 300 400 500

g h I j k l m

1200 1000 800 600 400 200 0

0 400 800 1200 1600 2000 2400

Texti

les

(kilo

s m

)

0

200

400

600

800

1000

0 200 400 600 800 1000

a

b

c

d

e

f

Less developedcountry

Pre-trade production and consumption possibilities

Workers can produce 1000 Kilos of textiles

OR

500 Computers

Or anything in betweenOr anything in between

Page 4: Pre-trade production and consumption possibilities Computers (Millions) Textiles (kilos m) a Less developed Country, population 500

Computers (Millions)

Less developed country Developed country

Textiles (kilos m)

Computers (millions)

Textiles (kilos m)

Computers (millions)

a b c d e f

1000 800 600 400 200 0

0 100 200 300 400 500

g h I j k l m

1200 1000 800 600 400 200 0

0 400 800 1200 1600 2000 2400

Texti

les

(kilo

s m

)

0

200

400

600

800

1000

0 200 400 600 800 1000

a

b

c

d

e

f

Less developedcountry

Pre-trade production and consumption possibilities

Workers can produce 1000 Kilos of textiles

OR

500 Computers

Or anything in betweenOr anything in between

Page 5: Pre-trade production and consumption possibilities Computers (Millions) Textiles (kilos m) a Less developed Country, population 500

Computers (Millions)

Less developed country Developed country

Textiles (kilos m)

Computers (millions)

Textiles (kilos m)

Computers (millions)

a b c d e f

1000 800 600 400 200 0

0 100 200 300 400 500

g h I j k l m

1200 1000 800 600 400 200 0

0 400 800 1200 1600 2000 2400

Texti

les

(kilo

s m

)

0

200

400

600

800

1000

0 200 400 600 800 1000

a

b

c

d

e

f

Less developedcountry

Pre-trade production and consumption possibilities

Workers can produce 1000 Kilos of textiles

OR

500 Computers

So can produce in the ratio of 2 Textiles for 1

Computer

So can produce in the ratio of 2 Textiles for 1

Computer

Page 6: Pre-trade production and consumption possibilities Computers (Millions) Textiles (kilos m) a Less developed Country, population 500

Computers (Millions)

Less developed country Developed country

Textiles (kilos m)

Computers (millions)

Textiles (kilos m)

Computers (millions)

a b c d e f

1000 800 600 400 200 0

0 100 200 300 400 500

g h I j k l m

1200 1000 800 600 400 200 0

0 400 800 1200 1600 2000 2400

Texti

les

(kilo

s m

)

0

200

400

600

800

1000

0 200 400 600 800 1000

a

b

c

d

e

f

Less developedcountry

Pre-trade production and consumption possibilities

So can produce in the ratio of 2 Textiles for 1 Computer

Or it takes 2 units of textiles to purchase 1 unit of

computers

Page 7: Pre-trade production and consumption possibilities Computers (Millions) Textiles (kilos m) a Less developed Country, population 500

Computers (Millions)

Less developed country Developed country

Textiles (kilos m)

Computers (millions)

Textiles (kilos m)

Computers (millions)

a b c d e f

1000 800 600 400 200 0

0 100 200 300 400 500

g h I j k l m

1200 1000 800 600 400 200 0

0 400 800 1200 1600 2000 2400

Texti

les

(kilo

s m

)

0

200

400

600

800

1000

0 200 400 600 800 1000

a

b

c

d

e

f

Less developedcountry

Pre-trade production and consumption possibilities

Formally we say….

the RELATIVE price of Computers

in terms of Textiles

(not money!!) is

Pc/Pt=2/1

Page 8: Pre-trade production and consumption possibilities Computers (Millions) Textiles (kilos m) a Less developed Country, population 500

Computers (Millions)

Less developed country Developed country

Textiles (kilos m)

Computers (millions)

Textiles (kilos m)

Computers (millions)

a b c d e f

1000 800 600 400 200 0

0 100 200 300 400 500

g h I j k l m

1200 1000 800 600 400 200 0

0 400 800 1200 1600 2000 2400

Texti

les

(kilo

s m

)

0

200

400

600

800

1000

0 200 400 600 800 1000

a

b

c

d

e

f

Less developedcountry

Pre-trade production and consumption possibilities

Or alternatively

the RELATIVE price of Textiles

in terms of Computers in the LDC is

Pt/Pc=1/2

Page 9: Pre-trade production and consumption possibilities Computers (Millions) Textiles (kilos m) a Less developed Country, population 500

0

400

800

1200

1600

2000

2400

0 400 800 1200 1600 2000 2400

Texti

les

(kilo

s m

)

Computers (Millions)

Pre-trade production and consumption possibilities

Developed Country can produce in the ratio of 2

Computers for 1 K of Textiles

Or it takes 1 units of textiles to purchase 2 unit of computers

SO it takes 1/2 units of textiles to purchase 1 unit of computers

Less developed country Developed country

Textiles (kilos m)

Computers (millions)

Textiles (kilos m)

Computers (millions)

a b c d e f

1000 800 600 400 200 0

0 100 200 300 400 500

g h I j k l m

1200 1000 800 600 400 200 0

0 400 800 1200 1600 2000 2400

Page 10: Pre-trade production and consumption possibilities Computers (Millions) Textiles (kilos m) a Less developed Country, population 500

0

400

800

1200

1600

2000

2400

0 400 800 1200 1600 2000 2400

Texti

les

(kilo

s m

)

Computers (Millions)

Pre-trade production and consumption possibilities

So the RELATIVE Price of a 1 computer in terms of

textiles in the Developed Country is

Pc/Pt=1/2

Less developed country Developed country

Textiles (kilos m)

Computers (millions)

Textiles (kilos m)

Computers (millions)

a b c d e f

1000 800 600 400 200 0

0 100 200 300 400 500

g h I j k l m

1200 1000 800 600 400 200 0

0 400 800 1200 1600 2000 2400

Page 11: Pre-trade production and consumption possibilities Computers (Millions) Textiles (kilos m) a Less developed Country, population 500

0

400

800

1200

1600

2000

2400

0 400 800 1200 1600 2000 2400

Texti

les

(kilo

s m

)

Computers (Millions)

Pre-trade production and consumption possibilities

OR the RELATIVE Price of a 1 unit of texties computer in

terms of computers in the Developed Country is

Pt/Pc=2/1

Less developed country Developed country

Textiles (kilos m)

Computers (millions)

Textiles (kilos m)

Computers (millions)

a b c d e f

1000 800 600 400 200 0

0 100 200 300 400 500

g h I j k l m

1200 1000 800 600 400 200 0

0 400 800 1200 1600 2000 2400

Page 12: Pre-trade production and consumption possibilities Computers (Millions) Textiles (kilos m) a Less developed Country, population 500

0

200

400

600

800

1000

0 200 400 600 800 1000

Computers (Millions)

Less developed country Developed country

Textiles (kilos m)

Computers (millions)

Textiles (kilos m)

Computers (millions)

a b c d e f

1000 800 600 400 200 0

0 100 200 300 400 500

g h I j k l m

1200 1000 800 600 400 200 0

0 400 800 1200 1600 2000 2400

Texti

les

(kilo

s m

)

a

b

c

d

e

f0

400

800

1200

1600

2000

2400

0 400 800 1200 1600 2000 2400

Texti

les

(kilo

s m

)

Computers (Millions)

gh

ij

kl

m

Less developedcountry

Developedcountry

Slope 2/1 Slope 1/2

Pre-trade production and consumption possibilities

Page 13: Pre-trade production and consumption possibilities Computers (Millions) Textiles (kilos m) a Less developed Country, population 500

0

200

400

600

800

1000

0 200 400 600 800 1000

Computers (Millions)

Texti

les

(kilo

s m

)

a

b

c

d

e

f0

400

800

1200

1600

2000

2400

0 400 800 1200 1600 2000 2400

Texti

les

(kilo

s m

)

Computers (Millions)

gh

ij

kl

m

Less developedcountry

Developedcountry

Slope 2/1 Slope 1/2

Pre-trade production and consumption possibilities

Developed countries relative pre-trade price = Pc /Pt=1/2

Less-Developed countries relative pre-trade price = Pc /Pt= 2

Page 14: Pre-trade production and consumption possibilities Computers (Millions) Textiles (kilos m) a Less developed Country, population 500

Computers (Millions)

Texti

les

(kilo

s m

)

a

b

c

d

e

f0

400

800

1200

1600

2000

2400

0 400 800 1200 1600 2000 2400

Texti

les

(kilo

s m

)

Computers (Millions)

gh

ij

kl

m

Less developedcountry

Developedcountry

Slope 2/1 Slope 1/2

So C is relatively cheap in the Developed countries (it has a comparative advantage in Computers)

And relatively expensive in the Less-Developed countries whereas Textiles are relatively cheaper. (The LDC is LESS

BAD at Textiles and therefore Textiles are its comparative advantage)

0

200

400

600

800

1000

0 200 400 600 800 1000

Page 15: Pre-trade production and consumption possibilities Computers (Millions) Textiles (kilos m) a Less developed Country, population 500

Effect of trade on consumption possibilitiesTe

xtile

s (k

ilos

m)

0

200

400

600

800

1000

0 200 400 600 800 10000

400

800

1200

1600

2000

2400

0 400 800 1200 1600 2000 2400

Computers (Millions)

Texti

les

(kilo

s m

)

Computers (Millions)

Less developed country Developed country

Slope 1/1 Slope 1/1

Possibilities have clearly risen

So can’t be worse off!!

Page 16: Pre-trade production and consumption possibilities Computers (Millions) Textiles (kilos m) a Less developed Country, population 500

0

200

400

600

800

1000

0 200 400 600 800 1000

Computers (Millions)

Texti

les

(kilo

s m

)

a

b

c

d

e

f0

400

800

1200

1600

2000

2400

0 400 800 1200 1600 2000 2400

Texti

les

(kilo

s m

)

Computers (Millions)

gh

ij

kl

m

Less developedcountry

Developedcountry

Slope 2/1 Slope 1/2

If there is no trade (the country is in Autarky) then the production possibility frontier in each case also represents the consumption possibilities. The bundle each consumes

will depend on tastes but production and consumption will be the same.

Page 17: Pre-trade production and consumption possibilities Computers (Millions) Textiles (kilos m) a Less developed Country, population 500

0

200

400

600

800

1000

0 200 400 600 800 1000

Computers (Millions)

Texti

les

(kilo

s m

)

a

b

c

d

e

f0

400

800

1200

1600

2000

2400

0 400 800 1200 1600 2000 2400

Texti

les

(kilo

s m

)

Computers (Millions)

gh

ij

kl

m

Less developedcountry

Developedcountry

Slope 2/1 Slope 1/2

If we now allow free trade between the two countries, the free trade price must lie between the two sets of AUTARKY

prices

FTt

FTC

P

P

Page 18: Pre-trade production and consumption possibilities Computers (Millions) Textiles (kilos m) a Less developed Country, population 500

0

200

400

600

800

1000

0 200 400 600 800 1000

Computers (Millions)

Texti

les

(kilo

s m

)

a

b

c

d

e

f0

400

800

1200

1600

2000

2400

0 400 800 1200 1600 2000 2400

Texti

les

(kilo

s m

)

Computers (Millions)

gh

ij

kl

m

Less developedcountry

Developedcountry

Slope 2/1 Slope 1/2

If we now allow free trade between the two countries, the free trade price must lie between the two sets of AUTARKY

prices

2

12

FTt

FTC

P

P

Page 19: Pre-trade production and consumption possibilities Computers (Millions) Textiles (kilos m) a Less developed Country, population 500

0

200

400

600

800

1000

0 200 400 600 800 1000

Computers (Millions)

Texti

les

(kilo

s m

)

a

b

c

d

e

f0

400

800

1200

1600

2000

2400

0 400 800 1200 1600 2000 2400

Texti

les

(kilo

s m

)

Computers (Millions)

gh

ij

kl

m

Less developedcountry

Developedcountry

Slope 2/1 Slope 1/2

If we now allow free trade between the two countries, the free trade price must lie between the two sets of AUTARKY

prices

1FTt

FTC

P

PSuppose

Page 20: Pre-trade production and consumption possibilities Computers (Millions) Textiles (kilos m) a Less developed Country, population 500

0

200

400

600

800

1000

0 200 400 600 800 10000

400

800

1200

1600

2000

2400

0 400 800 1200 1600 2000 2400

Effect of trade on consumption possibilities

Computers (Millions)

Texti

les

(kilo

s m

)

Texti

les

(kilo

s m

)

Computers (Millions)

Less developed country Developed country

1FTt

FTC

P

PSuppose

Page 21: Pre-trade production and consumption possibilities Computers (Millions) Textiles (kilos m) a Less developed Country, population 500

Effect of trade on consumption possibilitiesTe

xtile

s (k

ilos

m)

0

200

400

600

800

1000

0 200 400 600 800 10000

400

800

1200

1600

2000

2400

0 400 800 1200 1600 2000 2400

Computers (Millions)

Texti

les

(kilo

s m

)

Computers (Millions)

Less developed country Developed country

Slope 1/1 Slope 1/1

Possibilities have clearly risen

So can’t be worse off!!

Page 22: Pre-trade production and consumption possibilities Computers (Millions) Textiles (kilos m) a Less developed Country, population 500

0

400

800

1200

1600

2000

2400

0 400 800 1200 1600 2000 24000

200

400

600

800

1000

0 200 400 600 800 1000

Effect of trade on consumption possibilities

Computers (Millions)

Texti

les

(kilo

s m

)

Texti

les

(kilo

s m

)

Computers (Millions)

Less developed country Developed country

Imports

600

Exports600

Exports600

x

y

Imports 600

Imports 600