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Equilibrium before trade

Explore how the allocation of capital and labor impacts production in developed and less developed countries. Learn about trade equilibrium, production frontiers, and the effects of free trade on textiles and computers.

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Equilibrium before trade

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  1. Equilibrium before trade Suppose Computers need mostly capital and textiles need mostly labour, and suppose Developed country has mostly capital and the less developed country has mostly labour Textiles O Computers

  2. Equilibrium before trade Suppose initially each country put exactly half their workers in to producing computers and textiles Textiles DC LDC O Computers

  3. Labour abundant LDC If capital and labour were used in the same ratio in both industries then if I want to produce more T or more C then move in a straight line either way along the production frontier Textiles LDC O Computers

  4. Labour abundant LDC But if Textiles are more labour intensive then can produce more, And if computers are capital intensive cannot produce as much Textiles LDC So Production frontier looks like… O Computers

  5. Labour abundant LDC Alternative explanation: As we move down from the spot, to produce more computers we are allocating more capital & workers but since capital is relatively scarce, capital per worker is lower, so not getting much extra production. Textiles LDC O Computers

  6. Labour abundant LDC AND…. As we move UP from the spot, to produce more textiles, we are allocating more workers and capital but workers per machine is rising, so can produce more. Textiles LDC O Computers

  7. Capital abundant Developed Country For DC Textiles are more labour intensive so produce……. LESS Textiles DC LDC O Computers

  8. Capital abundant Developed Country And since Computers are more capital intensive can produce……. MORE Textiles DC LDC So Production frontier looks like… O Computers

  9. Trade Assume initially that each country produces & consumes at the dots Textiles DC LDC O Computers

  10. Note in LDC Computers will be RELATIVELY expensive, e.g, Pc /Pt = 2/1 while in DC they will be relatively cheap e.g. Pc /Pt =1/2 Textiles DC LDC O Computers

  11. Now suppose we allow free trade……. And have a common price that lies in between Textiles DC LDC O Computers

  12. Now suppose we allow free trade……. And have a common price that lies in between LDC EXPORT DC IMPORTS Textiles IMPORT DC LDC DC EXPORT O Computers

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