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)
Texti
les
(kilo
s m
)
0
200
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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
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
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
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
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
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
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
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
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
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
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
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
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
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
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!!
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.
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
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
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
0
200
400
600
800
1000
0 200 400 600 800 10000
400
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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
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!!
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