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Session 4

Session 4. Trade: Factor Availability and Factor Proportions Are Key. The Constant Cost Assumption. Wheat (billion of unit per year). United States. 50. (PPC) Trade line. 50. Cloth (billion of unit per year). 0. What’s behind the bowed-out production-possibility curve ?.

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Session 4

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  1. Session 4 Trade: Factor Availability and Factor Proportions Are Key

  2. The Constant Cost Assumption Wheat (billion of unit per year) United States 50 (PPC) Trade line 50 Cloth(billion of unit per year) 0

  3. What’s behind the bowed-out production-possibility curve ? 1) Different products employ different resources. Different Cost Product 1 Product 2

  4. 2) Different products use resources in different proportions. Different Cost Product 3 Product 4

  5. PCC with Different Cost of Production S1 S0 100 50 80 Change = 50 Change = 20 Change = 20 Change = 40 Wheat (billion of unit per year) 40 United States 0 20 60 Cloth(billion of unit per year)

  6. Community Indifferent Curves An ‘indifferent curve’ shows the various combinations of consumption quantities (here wheat and cloth) that leadto the same level of well-being or happiness. Production Budget Constraint A B C Point of consumption

  7. B2 B1 Better B3 I2 I1 Worse I3

  8. Production & Consumption Together WithoutTrade PPC United States S1 S0 I1 I3 I2

  9. WithoutTrade PPC Rest of the World I1 I2 I3 S0 S1

  10. With Trade I2 I2 S1 C1 C1 S0 S0 S1

  11. Heckscher-Ohlin Theory of Trade • A country will export products that use relatively intensively those production factors found relatively abundantly in the country, and import products that use relatively intensively those production factors that are relatively scarce in the country.

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