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

12.2.5 MANY COUNTRIES, MANY COMMODITIES: 
Real world is obviously not so simple as to comprise two 
trading nations only. In actual practice there will be many countries 
trying to sell or buy many commodities. How does one determine 
the import and export items of a particular country? The answer is 
here one has to compare hourly output per labour for a given 
commodity across many countries. The country with the least 
average cost will be the ideal choice. Whether entire amount of 
imports will be made from that country depends upon its capacity to 
supply the requisite amount of goods demanded. If it is a small 
country and production capacity is limited, importing country might 
have to buy the commodity from more than one source. 
 
12.2.6 PRODUCTION GAINS FROM TRADE: 
The distribution of production between two commodities in a 
given country can be shown with the help of production possibility 
curve. We assume that all the available labour is fully employed as 
between the two industries. In case all the labour is employed in 
wine, we can easily find out the maximum output of wine because 
output per man hour is already known. Similarly maximum output of 
cloth can be found out. Now we draw a diagramme where x-axis 
measures amounts of cloth and y-axis shows quantities of wine 
produced. By joining the two points showing maximum output levels 
of wine and cloth we obtain the production possibilities line. Each 
point on this line shows various combinations of wine and cloth that 
can be produced while labour is fully employed. 

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Figure 12.1 
The PP line in the figure shows the production possibilities 
line. Before trade starts equilibrium production takes place at A 
where 80 bottles of wine and 60 yards of cloth are produced. Once 
trade starts the country specializes more and more in favour of 
cloth and complete specialization is reached at point P' where 140 
yards of cloth are produced. The significance of a straight line PPF 
is that its slope is constant meaning that as we move down the line 
the rate of replacement of one output by another remains constant. 
It does not impose any real burden on society whether labour is 
employed in wine or shifted from there to the other industry. It is a 
case of constant cost PPF. 
The presence of increasing cost is more often a reality in 
industrial sector. One unit of labour withdrawn from a particular 
industry may imply a large reduction in output which cannot be 
compensated by the labour employment in another branch of 
industry. In that case slope of the line indicating ratio of marginal 
productivities does not remain constant. By shifting labour which is 
skilled in a particular sector we impose a net burden on society. 
The shape of the PPF under increasing cost is shown in the 
next diagramme. As labour is being shifted from wine to cloth, 
substitution of wine by cloth becomes progressively more difficult 
because reduction in output of wine cannot be offset by increase in 
cloth. In other words a given increase in cloth output requires a 
much larger sacrifice in terms of wine.