If we want two units of D, we can have only 30 units of G. if we want 36 units of G, we find that we can have one unit of D, with all our resources fully employed. If all our resources are devoted to the production of G, we find that we can produce 40 units of G. ![]() Suppose we take a given amount of land, labour and capital and experimentally find out how much G and D we can produce. Increasing opportunity costs can best be explained by the use of a table. But eventually, the resources being transferred are not well-suited to G but highly suited to D and consequently G’s production increases by little and D’s fall by a great deal. At first as production G is increased, resources suited to G but not to D are used to increase greatly the output of G and reduce the output of D by little. Increasing opportunity costs mean that for each additional unit of G produced, ever-increasing amounts of D must be given up. Constant costs imply that all resources are of equal quality and that they are all equally suited to the production of both commodities. It would seem unlikely that most nations would be confronted with constant costs over the substantial range of production. In this case, demand has nothing to be with the price. Under constant cost, the exchange ratio is determined solely by costs the demand determines only the allocation of available factors between the two branches of production, and hence the relative quantities of G and D which are produced. Obviously a larger volume of trade allows larger gains from trade and a greater increase in the standard of living. The gains from trade rest further upon the amount of trade taking place. The greater the difference, the greater is the gains from trade. The gains from trade for a particular nation depend on how much the international exchange rates differ from that nation’s MRT. With constant returns to scale, trade can take place only when each nation has a different MRT. On the other hand, country W has the comparative advantage in the production of G 1 less D has to be given up to produce an additional unit G. It can be seen that the MRT of G for D is 8 to 1 reducing the output of D by one unit will provide resources sufficient to expand output of G by 8 units.Ĭountry, Z has a comparative advantage in the production of D less G has to be given up for each additional unit of D. ![]() Since the MRT is constant the slope must be constant and thus the production possibilities curve must be straight line. The slope shows the reduction required in one commodity in order to increase the output of the second commodity. ![]() The slope of the production possibilities curve is the marginal rate of transformation. The full employment output under consideration must be on the production possibilities curve. Points beyond the curve, such as (h), require more resources than the country possesses and are therefore also beyond consideration. Points inside the curve such as (g) -represent outputs of less than full employment and are therefore not considered. The particular combination to be chosen lies on the curve. The production possibilities curve (MM) then shows all possible combinations of two commodities which country W might produce. ![]() In contrast, it may be assumed that the opportunity cost is one of increasing cost this means that every time an additional unit of D is produced, ever increasing amount of G must be given up in order to provide the resources for expanding D’s output. In this case the amount of G given up to allow additional production of D is the same regardless of the amount of G and D being produced. It may be assumed that opportunity cost is constant. The shape of the curve depends on the assumptions made about the opportunity costs. That is, the marginal opportunity cost of an extra unit of one commodity is the necessary reduction in the output of the other. The slope of the curve at any point represents the ratio of the marginal opportunity costs of the two commodities. It is a simple device for depicting all possible combinations of two goods which a nation might produce with a given resources. A production-possibility curve (Samuelson) in the international trader literature is also known as the substitution curve (Haberler), production indifference curve (Lerner) and transformation curve.
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