1. Trade: Factor Availability and Factor Proportions Are Key
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

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

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

5. 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

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.
Production A B C
Budget Constraint
Point of consumption

7. I2 B2
Better I1 B1 I3 B3
Worse

8. Production & Consumption Together
Without Trade
PPC
United States S1 S0

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

10. I2
With Trade 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.