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the standard theory of international trade. (community indifference curves…
the standard theory of international trade.
the production frontier with increasing costs
reasons for increasing opportunity cost and different production frontiers.
resources or factors of production are not homologous
nation must give up more and more of the second commodity to release just enough resources to produce each additional unit of the first commodity.
the different in the production frontiers is that the two nations have different factor endowments .
MRT (the opportunity cost)
illustration of increasing costs (concave PF)
community indifference curves
the various combinations of two goods that yield the same utility.
illustration of community indifference curves (concave)
MRS (the amount of one the must be given up for the other)
this is given by the absolute slope of the community indifference curve.
declining MRS means means that the community indifference curve is convex, declining MRS is represented here.
refers to a particular income distribution.
new income distbeuion new curves, might intersect the prev ones.
the same thing happens when the nation opens to trade.
(importers will suffer an exporters thrive).
trade will also change the distribution of real income.
compensation principal: (the nation benefits if the gainers would be better off even after fully compensating the losers for their losses)
the basis for and the gain from trade with increasing costs
comparative advantage
equilibrium-relative commodity prices with trade
(P = 1) in any other relevant price place could not persist.
if Px/Py > 1 the equilibrium price would fall to 1, the inverse for Px/Py < 1.
incomplete specialization
increasing opportunity cost
the gains from exchange and specialization.
trade based on differences in tastes
equilibrium in isolation.
without trade it reaches its highest indifference curve tangentially to the PF
P = OC