2. Equilibrium before trade O Textiles Computers 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

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

4. Labour abundant LDC O Textiles Computers 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

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

6. Labour abundant LDC O Textiles Computers 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.

7. Labour abundant LDC O Textiles Computers 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.

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

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

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

11. O Textiles Computers LDC DC Note in LDC Computers will be RELATIVELY expensive, e.g, P c /P t = 2/1 while in DC they will be relatively cheap e.g. P c /P t =1/2

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

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