Syllabus T. Y. B. A. Paper : IV advanced economic theory with effect from academic year 2010-11 in idol

Figure 12.6
 
The curve shows the different combinations of two goods 
textiles and steel produced by say country A. Provided aggregate 
resources of labour and capital are fully employed the country can 
produce either OS of steel and no cloth or OC of textiles and no 
steel. As between C and S the country can produce variety of 
combinations of cloth and steel. The important thing is that to 
produce more S one has to sacrifice some C. This restriction 
obviously indicates the limited nature of resources. Because there 
is full employment to produce more S one must draw labour and 
capital engaged in the production of cloth. The concave nature of 
the curve is explained by the fact that if one tries to increase 
production of cloth, steel will release more labour and less capital 
since it wants to preserve capital vital for its production process. 
Textiles being labour intensive will readily absorb labour and 
expand production. Subsequently however release of additional 
labour will be different for S and it will suffer greater reduction in 
output than earlier. 
Before trade country one will produce more of steel and 
country two will produce more cotton as shown in the following 
diagram. 
O
C
C
S
S
Country
I
O
C
C
S
S
Country II
Figure 12.7 
It is evident that
I
II
Ps
Ps
<
PC
PC
Statement of the theorem 
A country will tend to export the commodity which uses its 
abundant factor in an intensive way. 
Once trade opens up internal price ratios will no longer be 
valid and a uniform price ratio will be established. Relative price of 
steel will surely be higher than that prevailing in the case of country 
one. The post trade situation for country one is shown in the 
following figure: