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

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

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

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

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

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. Production A B C Budget Constraint Point of consumption

I2 B2 Better I1 B1 I3 B3 Worse

Production & Consumption Together Without Trade PPC United States S1 S0

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

I2 With Trade I2 S1 C1 C1 S0 S0 S1

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.