Pre-trade production and consumption possibilities Computers (Millions) Textiles (kilos m) a Less developed Country, population 500.

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Pre-trade production and consumption possibilities Computers (Millions) Textiles (kilos m) a Less developed Country, population 500

Computers (Millions) Textiles (kilos m) a b Less developed country Pre-trade production and consumption possibilities

Computers (Millions) Textiles (kilos m) a b c d e f Less developed country Pre-trade production and consumption possibilities Workers can produce 1000 Kilos of textiles OR 500 Computers Or anything in between

Computers (Millions) Textiles (kilos m) a b c d e f Less developed country Pre-trade production and consumption possibilities Workers can produce 1000 Kilos of textiles OR 500 Computers Or anything in between

Computers (Millions) Textiles (kilos m) a b c d e f Less developed country Pre-trade production and consumption possibilities Workers can produce 1000 Kilos of textiles OR 500 Computers So can produce in the ratio of 2 Textiles for 1 Computer

Computers (Millions) Textiles (kilos m) a b c d e f Less developed country Pre-trade production and consumption possibilities So can produce in the ratio of 2 Textiles for 1 Computer Or it takes 2 units of textiles to purchase 1 unit of computers

Computers (Millions) Textiles (kilos m) a b c d e f Less developed country Pre-trade production and consumption possibilities Formally we say…. the RELATIVE price of Computers in terms of Textiles (not money!!) is P c /P t =2/1

Computers (Millions) Textiles (kilos m) a b c d e f Less developed country Pre-trade production and consumption possibilities Or alternatively the RELATIVE price of Textiles in terms of Computers in the LDC is P t /P c =1/2

Textiles (kilos m) Computers (Millions) Pre-trade production and consumption possibilities Developed Country can produce in the ratio of 2 Computers for 1 K of Textiles Or it takes 1 units of textiles to purchase 2 unit of computers SO it takes 1/2 units of textiles to purchase 1 unit of computers

Textiles (kilos m) Computers (Millions) Pre-trade production and consumption possibilities So the RELATIVE Price of a 1 computer in terms of textiles in the Developed Country is P c /P t =1/2

Textiles (kilos m) Computers (Millions) Pre-trade production and consumption possibilities OR the RELATIVE Price of a 1 unit of texties computer in terms of computers in the Developed Country is P t /P c =2/1

Computers (Millions) Textiles (kilos m) a b c d e f Computers (Millions) g h i j k l m Less developed country Developed country Slope 2/1 Slope 1/2 Pre-trade production and consumption possibilities

Computers (Millions) Textiles (kilos m) a b c d e f Computers (Millions) g h i j k l m Less developed country Developed country Slope 2/1 Slope 1/2 Pre-trade production and consumption possibilities Developed countries relative pre-trade price = P c /P t =1/2 Less-Developed countries relative pre-trade price = P c /P t = 2

Computers (Millions) Textiles (kilos m) a b c d e f Computers (Millions) g h i j k l m Less developed country Developed country Slope 2/1 Slope 1/2 So C is relatively cheap in the Developed countries (it has a comparative advantage in Computers) And relatively expensive in the Less-Developed countries whereas Textiles are relatively cheaper. (The LDC is LESS BAD at Textiles and therefore Textiles are its comparative advantage)

Effect of trade on consumption possibilities Textiles (kilos m) Computers (Millions) Textiles (kilos m) Computers (Millions) Less developed country Developed country Slope 1/1 Possibilities have clearly risen So cant be worse off!!

Computers (Millions) Textiles (kilos m) a b c d e f Computers (Millions) g h i j k l m Less developed country Developed country Slope 2/1 Slope 1/2 If there is no trade (the country is in Autarky) then the production possibility frontier in each case also represents the consumption possibilities. The bundle each consumes will depend on tastes but production and consumption will be the same.

Computers (Millions) Textiles (kilos m) a b c d e f Computers (Millions) g h i j k l m Less developed country Developed country Slope 2/1 Slope 1/2 If we now allow free trade between the two countries, the free trade price must lie between the two sets of AUTARKY prices

Computers (Millions) Textiles (kilos m) a b c d e f Computers (Millions) g h i j k l m Less developed country Developed country Slope 2/1 Slope 1/2 If we now allow free trade between the two countries, the free trade price must lie between the two sets of AUTARKY prices

Computers (Millions) Textiles (kilos m) a b c d e f Computers (Millions) g h i j k l m Less developed country Developed country Slope 2/1 Slope 1/2 If we now allow free trade between the two countries, the free trade price must lie between the two sets of AUTARKY prices

Effect of trade on consumption possibilities Computers (Millions) Textiles (kilos m) Computers (Millions) Less developed country Developed country

Effect of trade on consumption possibilities Textiles (kilos m) Computers (Millions) Textiles (kilos m) Computers (Millions) Less developed country Developed country Slope 1/1 Possibilities have clearly risen So cant be worse off!!

Effect of trade on consumption possibilities Computers (Millions) Textiles (kilos m) Computers (Millions) Less developed country Developed country Imports 600 Exports600 Exports 600 x y Imports 600

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