Efficiency Gain of International Trade Essay - 1745 Words

In evaluating the efficiency gain of international trade, we are concerned about the entire country or community, and thus encounter a more complicated situation with several individuals making up the entire country. Answer these questions (provide graphs if you want): What is meant by the community indifference curve? The community indifference curve shows the various combinations of two commodities which yield the same level of satisfaction or utility to a community or nation. It is intended to represent the preferences of a country as a whole and is a convenient tool for deriving quantities of trade in a two-good model. The slope of a curve at any point gives the marginal rate of substitution or the amount of a commodity which a†¦show more content†¦The shape of the production possibility frontier (PPF) of a country depends on: (1) its factor endowments and (2) the production functions of the various commodities. The plausible shapes of the production possibility frontier include: Linear Suppose there are constant returns to scale in both industries and only one factor, then the production possibility frontier is a straight line. If the opportunity cost is constant as production of different goods is changing, then a linear PPF is produced. Concave (towards origin) Suppose there is diseconomies of scale or decreasing returns to scale. Under full utilization of resources, the production possibility frontier is concave towards the origin. This shape is basically due to the differences in optimal factor intensities between industries. If a country faces increasing opportunity costs or marginal rate of transformation (MRT) in producing more units of a commodity, then this is shown by a PPF that is concave. The country will produce where the MRT is equal to the equilibrium relative commodity price. Convex (towards origin) Suppose there is economies of scale or increasing returns to scale. Under full utilization of resources, the production possibility frontier is convex towards the origin. If there is increasing returns to scale in either or both industries and there is one factor of production then the production set is non-convex.Show MoreRelatedEssay about Advantages and Disadvantages of Free International Trade1283 Words   |  6 Pages1a) Advantages of free international trade 1. Increasing the production. Countries are enabled by free international trade to specialise or to focus in the production of the goods in which they have a comparative advantage. Specialisation countries can take the benefit of efficiencies generated from increased output and economies of trade. 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