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Trade Impact on Production: Textiles & Computers in Developed & Less Developed Countries

Explore the pre-trade production & consumption possibilities of textiles and computers in both less developed and developed countries. Understand the relative prices of the goods to determine comparative advantages. Analyze the effect of trade on consumption possibilities and the impact on the production frontier. Delve into the implications of free trade on the prices and consumption patterns between the two types of economies.

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Trade Impact on Production: Textiles & Computers in Developed & Less Developed Countries

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  1. Pre-trade production and consumption possibilities a Less developed Country, population 500 Textiles (kilos m) Computers (Millions)

  2. Pre-trade production and consumption possibilities a Less developed country b Textiles (kilos m) Computers (Millions)

  3. Pre-trade production and consumption possibilities a Workers can produce 1000 Kilos of textiles OR 500 Computers Less developed country b c Textiles (kilos m) d e Or anything in between f Computers (Millions)

  4. Pre-trade production and consumption possibilities a Workers can produce 1000 Kilos of textiles OR 500 Computers Less developed country b c Textiles (kilos m) d e Or anything in between f Computers (Millions)

  5. Pre-trade production and consumption possibilities a Workers can produce 1000 Kilos of textiles OR 500 Computers Less developed country b c Textiles (kilos m) d e So can produce in the ratio of 2 Textiles for 1 Computer f Computers (Millions)

  6. Pre-trade production and consumption possibilities a So can produce in the ratio of 2 Textiles for 1 Computer Less developed country b c Textiles (kilos m) d Or it takes 2 units of textiles to purchase 1 unit of computers e f Computers (Millions)

  7. Pre-trade production and consumption possibilities a Formally we say…. the RELATIVE price of Computers in terms of Textiles (not money!!)is Pc/Pt=2/1 Less developed country b c Textiles (kilos m) d e f Computers (Millions)

  8. Pre-trade production and consumption possibilities a Or alternatively the RELATIVE price of Textiles in terms of Computers in the LDC is Pt/Pc=1/2 Less developed country b c Textiles (kilos m) d e f Computers (Millions)

  9. Pre-trade production and consumption possibilities Developed Country can produce in the ratio of 2 Computers for 1 K of Textiles Or it takes 1 units of textiles to purchase 2 unit of computers SO it takes 1/2 units of textiles to purchase 1 unit of computers Textiles (kilos m) Computers (Millions)

  10. Pre-trade production and consumption possibilities So the RELATIVE Price of a 1 computer in terms of textiles in the Developed Country is Pc/Pt=1/2 Textiles (kilos m) Computers (Millions)

  11. Pre-trade production and consumption possibilities OR the RELATIVE Price of a 1 unit of texties computer in terms of computers in the Developed Country is Pt/Pc=2/1 Textiles (kilos m) Computers (Millions)

  12. Pre-trade production and consumption possibilities a Less developed country Developed country b c g Textiles (kilos m) Textiles (kilos m) h Slope 1/2 d Slope 2/1 i j e k l m f Computers (Millions) Computers (Millions)

  13. Pre-trade production and consumption possibilities Developed countries relative pre-trade price = Pc /Pt=1/2 Less-Developed countries relative pre-trade price = Pc /Pt= 2 a Less developed country Developed country b c g Textiles (kilos m) Textiles (kilos m) h Slope 1/2 d Slope 2/1 i j e k l m f Computers (Millions) Computers (Millions)

  14. So C is relatively cheap in the Developed countries (it has a comparative advantage in Computers) And relatively expensive in the Less-Developed countries whereas Textiles are relatively cheaper. (The LDC is LESS BAD at Textiles and therefore Textiles are its comparative advantage) a Less developed country Developed country b c g Textiles (kilos m) Textiles (kilos m) h Slope 1/2 d Slope 2/1 i j e k l m f Computers (Millions) Computers (Millions)

  15. Slope 1/1 Slope 1/1 Textiles (kilos m) Computers (Millions) Computers (Millions) Less developed country Developed country Effect of trade on consumption possibilities Possibilities have clearly risen So can’t be worse off!! Textiles (kilos m)

  16. If there is no trade (the country is in Autarky) then the production possibility frontier in each case also represents the consumption possibilities. The bundle each consumes will depend on tastes but production and consumption will be the same. a Less developed country Developed country b c g Textiles (kilos m) Textiles (kilos m) h Slope 1/2 d Slope 2/1 i j e k l m f Computers (Millions) Computers (Millions)

  17. If we now allow free trade between the two countries, the free trade price must lie between the two sets of AUTARKY prices a Less developed country Developed country b c g Textiles (kilos m) Textiles (kilos m) h Slope 1/2 d Slope 2/1 i j e k l m f Computers (Millions) Computers (Millions)

  18. If we now allow free trade between the two countries, the free trade price must lie between the two sets of AUTARKY prices a Less developed country Developed country b c g Textiles (kilos m) Textiles (kilos m) h Slope 1/2 d Slope 2/1 i j e k l m f Computers (Millions) Computers (Millions)

  19. If we now allow free trade between the two countries, the free trade price must lie between the two sets of AUTARKY prices a Less developed country Developed country b c g Textiles (kilos m) Textiles (kilos m) h Slope 1/2 d Slope 2/1 i j e k l m f Computers (Millions) Computers (Millions)

  20. Effect of trade on consumption possibilities Textiles (kilos m) Textiles (kilos m) Computers (Millions) Computers (Millions) Less developed country Developed country

  21. Slope 1/1 Slope 1/1 Textiles (kilos m) Computers (Millions) Computers (Millions) Less developed country Developed country Effect of trade on consumption possibilities Possibilities have clearly risen So can’t be worse off!! Textiles (kilos m)

  22. Imports 600 600 Exports Exports 600 Effect of trade on consumption possibilities Imports 600 Textiles (kilos m) Textiles (kilos m) x y Computers (Millions) Computers (Millions) Less developed country Developed country

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