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(solution) Suppose two countries had differing production possibility frontiers and were currently producing...


Suppose two countries had differing production possibility frontiers and were currently producing at points with differing slopes (that is, differing relative opportunity costs). If there were no transportation or other charges associated with international transactions, how might world output be increased by having these firms alter their production plans? Develop a simple numerical example of these gains for the case where both countries have linear production possibility frontiers (with different slopes). Interpret this result in terms of the concept of ‘‘comparative advantage’’ from the theory of international trade.  

 


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Sep 13, 2020

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