Slide 2-1Copyright 2003 Pearson Education, Inc. RD' Q'Q' 2 RD 1 a LC /a LW a * LC /a * LW RS Figure 2-3: World Relative Supply.

Slide 2-1Copyright  2003 Pearson Education, Inc.  RD' Q'Q' 2   RD   1   a LC /a LW a * LC /a * LW RS   Figure 2-3: World Relative Supply. slide 0
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Slide 2-3Copyright 2003 Pearson Education, Inc. determining the relative price after trade -- 1 The equilibrium relative price of cheese is determined by the intersection of the relative supply and relative demand curves. When the relative price of cheese is between the two countries pretrade prices, each country will specialize in the production of the good in which it has a comparative advantage. H produces only cheese, F only wine. (point 1)

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Slide 2-1Copyright 2003 Pearson Education, Inc. RD' Q'Q' 2 RD 1 a LC /a LW a * LC /a * LW RS Figure 2-3: World Relative Supply and Demand Trade in a One-Factor World Relative price of cheese, P C /P W Relative quantity of cheese, Q C + Q * C Q W + Q * W L/a LC L * /a * LW 6/3=2 1/2 Slide 2-2Copyright 2003 Pearson Education, Inc. relative demand curve (RD) The RD curve shows that the demand for cheese relative to wine is a decreasing function of the price of cheese relative to that of wine. The downward slope of RD reflects substitution effects. Slide 2-3Copyright 2003 Pearson Education, Inc. determining the relative price after trade -- 1 The equilibrium relative price of cheese is determined by the intersection of the relative supply and relative demand curves. When the relative price of cheese is between the two countries pretrade prices, each country will specialize in the production of the good in which it has a comparative advantage. H produces only cheese, F only wine. (point 1) Slide 2-4Copyright 2003 Pearson Education, Inc. determining the relative price after trade -- 2 If the relative price of cheese is equal to its opportunity costin H, the H need not specialize in producing either cheese or wine. H must be producing both some wine and some cheese. F does specialize completely in producing wine. (point 2) Slide 2-5Copyright 2003 Pearson Education, Inc. Trade in a One-Factor World The Pattern of trade It therefore remains true that if acountry does specialize, it will do so in the good in which it has a comparative advantage. ; The relative price after trade if neither country produces both goods, we must have PCPWPCPW a LC a Lw a LC * a Lw *