International Economics
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Dominick-Salvatore-International-Economics
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3 C and the United Kingdom must give up 2C, no matter from which point on its production possibility frontier the nation starts. Constant opportunity costs arise when (1) resources or factors of production are either perfect substitutes for each other or used in fixed proportion in the production of both com- modities and (2) all units of the same factor are homogeneous or of exactly the same quality. Then, as each nation transfers resources from the production of cloth to the production of wheat, it will not have to use resources that are less and less suited to wheat production, no Salvatore c02.tex V2 - 10/26/2012 1:33 P.M. Page 44 44 The Law of Comparative Advantage matter how much wheat it is already producing. The same is true for the production of more cloth. Thus, we have constant costs in the sense that the same amount of one commodity must be given up to produce each additional unit of the second commodity. Although opportunity costs are constant in each nation, they differ among nations, pro- viding the basis for trade. Constant costs are not realistic, however. They are discussed only because they serve as a convenient introduction to the more realistic case of increasing costs, discussed in the next chapter. 2.5 D Opportunity Costs and Relative Commodity Prices We have seen that the opportunity cost of wheat is equal to the amount of cloth that the nation must give up to release just enough resources to produce one additional unit of wheat. This is given by the (absolute) slope of the production possibility frontier, or transformation curve, and is sometimes referred to as the marginal rate of transformation. Figure 2.1 shows that the (absolute) slope of the U.S. transformation curve is 120 / 180 = 2 / 3 = opportunity cost of wheat in the United States and remains constant. The slope of the U.K. transformation curve is 120 / 60 = 2 = opportunity cost of wheat in the United Kingdom and remains constant. On the assumptions that prices equal costs of production and that the nation does produce both some wheat and some cloth, the opportunity cost of wheat is equal to the price of wheat relative to the price of cloth (P W /P C ). Thus, P W /P C = 2 / 3 in the United States, and inversely P C /P W = 3 / 2 = 1.5. In the United Kingdom, P W /P C = 2, and P C /P W = 1 / 2 . The lower P W /P C in the United States ( 2 / 3 as opposed to 2) is a reflection of its comparative advantage in wheat. Similarly, the lower P C /P W in the United Kingdom ( 1 / 2 as opposed to 2 / 3 ) reflects its comparative advantage in cloth. Note that under constant costs, P W /P C is determined exclusively by production, or supply, considerations in each nation. Demand considerations do not enter at all in the determination of relative commodity prices . 0 20 40 60 80 100 120 30 60 90 120 150 180 Wheat United States A Cloth 0 20 40 60 80 100 120 20 40 60 Wheat United Kingdom A' Cloth FIGURE 2.1. The Production Possibility Frontiers of the United States and the United Kingdom. The U.S. and U.K. production frontiers are obtained by plotting the values in Table 2.4. The frontiers are downward, or negatively sloped, indicating that as each nation produces more wheat, it must give up some cloth. Straight-line production possibility frontiers reflect constant opportunity costs. Salvatore c02.tex V2 - 10/26/2012 1:33 P.M. Page 45 2.6 The Basis for and the Gains from Trade under Constant Costs 45 To conclude, we can say that the difference in relative commodity prices between the two nations (given by the difference in the slope of their transformation curves) is a reflection of their comparative advantage and provides the basis for mutually beneficial trade. 2.6 The Basis for and the Gains from Trade under Constant Costs In the absence of trade, a nation can only consume the commodities that it produces. As a result, the nation’s production possibility frontier also represents its consumption frontier . Which combination of commodities the nation actually chooses to produce and consume depends on the people’s tastes, or demand considerations. 2.6 A Illustration of the Gains from Trade In the absence of trade, the United States might choose to produce and consume combination Download 7.1 Mb. Do'stlaringiz bilan baham: |
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