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

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Presentation on theme: "Session 4 Trade: Factor Availability and Factor Proportions Are Key."— Presentation transcript:

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

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

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

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

5 United States Wheat (billion of unit per year) Cloth (billion of unit per year) S1 Change = S0 Change = 50 Change = 40 PCC with Different Cost of Production

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

7 I1 B1 I2 B2 Better I3 B3 Worse

8 Production & Consumption Together PPC I1 S0 I2 S1 I3 Without Trade United States

9 Without Trade PPC I1 I2 I3 Rest of the World S0 S1

10 With Trade S0 S1 I2 C1 I2 C1

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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