Draw a production possibilities frontier that is bowed out from the origin. Draw a straight line (the slope of which represents the autarky relative price of good X in terms of good Y) that is tangent to the PPF, and label it (Px/Py)1. Label the point of tangency E. Why is this point the autarky producer equilibrium?
Graph the following curves by clicking here
Draw a production possibilities frontier that is bowed out from the origin. Draw a community indifference curve that is just tangent to the PPF, and label it CI1. Draw a straight line (the slope of which represents the autarky relative price of good X in terms of good Y) that passes through this point of tangency, and label it (Px/Py)1. This point represents autarky equilibrium. Label it E. Graph the following curves by clicking here
How much of good X does this country produce and consume? Label this amount X1 on the horizontal axis.
How much of good Y does this country produce and consume? Label this amount Y1 on the vertical axis.
Suppose that when trade commences the international relative price of X in terms of Y is lower than the autarky price ratio. Draw this new price line, labeling it (Px/Py)2.
How does this change the country’s production mix? Label the new production point F, and label the amount of good X that is produced X2 on the horizontal axis, and the amount of good Y that is produced Y2 on the vertical axis.
Draw a new community indifference curve (label it CI2) that is
further from the origin than CI1 and is
tangent to the international price line (Px/Py)2.
Label the new consumption point C, and label the amount of good X that is consumed X3 on the horizontal axis, and the amount of good Y that is consumed Y3 on the vertical axis.
Which good does this country export? How much does it export?
Which good does this country import? How much does it import?
Suppose two countries have identical production conditions (so their production possibilities frontier will be identical), although the economies do have different demand conditions (that is, their community indifference curves will take on two different shapes).
Graph the following curves by clicking here
Draw this situation on a single graph. Draw a single PPF that represents production conditions in both countries. First, draw a community indifference curve for country 1 that is just tangent to the PPF at some point, and label it CI1a. Label the point of tangency E. Now, draw a second community indifference curve for country 2 that is just tangent to the PPF at some other point, and label it CI2a. Label the point of tangency e.
Draw two straight lines, one through the tangency at point E, and the other through the tangency at point e. What do the slopes of these lines represent?
Suppose now these two countries agree to trade. Draw a straight line tangent to the PPF the slope of which represents the international price ratio. Label this line (Px/Py)T. The slope of this line should be between the slopes of the two autarky price lines.
Label the point at which the international price line is tangent to the PPF “F.” Why must this be the trade production point for both countries?
Show on your graph that both countries can attain a higher indifference curve by trading.
