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International Trade and Creation Possibility Curve

1(a) Explain the link between International Trade and the Development Possibility Curve.

Quoting Benjamin Franklin, "No region was ever ruined by trade". International Trade is the exchange of goods between countries as a result of potential profits from this operation. Alternatively, the Production Opportunity Curve (PPC), also called the Production Opportunity Frontier or Boundary or the Transformation Curve shows the utmost combos of two goods that a country can produce, using its given resources with a given degree of technology. Both of these concepts can be colligated through numerous ways, as depicted below.

According to Samuelson, trade expands the Production Probability Frontier. That is, indeed, appropriate as trade gets the same result as an injection of capital in the economy or a noticable difference in technology. We can apply this idea in real by considering the exemplory case of Mauritius and the European Union (EU). The trade relations between Mauritius and the EU are strong, multi-layered and have grown over time. Mauritius, for instance, basically exports sugar, clothing/textiles and tuna and importsmachinery, travel equipment, food and created goods. The PPC is dependant on different assumptions, one of which stipulates that sources of a country will be diverted toward the development of two goods only. In this case, the example of sugar and travel equipment will be considered for Mauritius.

The previous diagram shows the PPC for Mauritius. In the beginning, Mauritius is producing 800 models of Glucose and 800 units of transportation equipment, at A. Considering that it is producing on the PPC, this implies that resources are being totally utilised. Thus, Mauritius is being productively productive. Point B depicts an underutilisation of resources and it is not attractive, while point C depicts an unattainable level of development in the brief run, but which is desirable. Now, assuming that the demand for transportation equipment goes up domestically, Mauritius has to find a way to cater for this. To produce more of travel equipment means that glucose must be sacrificed and let's assume that the quantity demanded for sweets remains the same, this won't prove right. Another assumption of the PPC theory is the fact the amount of technology remains regular and possessed there been any improvement in technology, Mauritius could have provided for the go up popular. However, in the brief run this is improbable and the simplest way is to get involved in International Trade. If 1200 products of carry equipment are needed, 200 systems should be imported from the E. This will likely alter the PPC outwards as shown below.

The PPF has shifted outwards but from the Y-axis only, due to an transfer of transfer equipment only. This is called an asymmetric progress. Mauritius will will have 1200 models of transport equipment at X scheduled to International trade. In essence, trade is as effective as exploring new resources or having an improvement in production techniques, which all cause an expansion in the PPC. This is very appealing for and economy and raises the typical of living of the population.

Moreover, the PPC and International Trade share another connection as the previous provides essential information as on what product should a country specialise. With trade, each and every country can focus on the production of goods and services that it's effective in producing while engaging in trade to acquire those goods it is less reliable in producing. That is a thought known as International Specialisation. Countries benefit hugely from specialisation and the idea of "Benefits from Trade" is shown through Definite Benefit and Comparative Advantages.

A country is said to have Absolute Edge in a good when, with the same amount or resources and technology, it is able to produce more of it than another. Adam Smith's style of International trade advocates that countries have Overall Advantage over one another. This can actually be represented on a PPC. Guess that Mauritius and the European union produce two goods, specifically Transfer Equipment and Sweets. Also, there are no transportation cost no obstacles and there are regular returns to scale, that is, the slope of the PPC is a straight, downward-sloping line. By dividing their resources evenly between your two goods, the PPC's are the following:

Country

Transport Equipment (units)

Sugar (units)

Mauritius

200

500

EU

500

200

 

From these diagram it is clear that Mauritius comes with an Absolute Gain in the development of Sugar, while the EU has an Absolute Benefits in the development of Transportation Equipment. Specialisation will, thus, profit both parties. The point is that the hyperlink between International Trade and the PPC is that Absolute Benefits can de depicted over a PPC. This idea can be used by a country to determine which goods it will specialise in, and exactly how much gains shall be reaped.

However, it is less evident that you will see gains when a country is more efficient in producing both goods. After that emerges the basic principle of Comparative Edge. This is the Ricardian model (named after David Ricardo) and concentrates on how Comparative Advantage develops due to variations in natural resources or technology. As a result well endowed, a country can produce a good at a lower opportunity cost than another. This is related to the PPC, as a simple use of your PPC is based on the depiction of Opportunity cost. It is to be observed that the Ricardian theory is dependant on a two-commodity and a two-country model. Applying this knowledge to the prior example, the assumption is that the European union represents one single country and the two commodities here being, carry equipment and glucose. Initially the quantity of goods made by each country, before specialisation, is really as follows:

Country

Transport Equipment

Sugar

Mauritius

500

250

EU

400

100

World's production

900

350

Mauritius, now, is effective in the production of both goods. However, increases remain possible from trade if opportunity cost ratios fluctuate. If it determines not to operate in any way and opts for self-sufficiency, every time that more of transfer machines were needed, resources would need to be diverted from the production of sugar. This can be shown by a movement on the PPC.

 

If Mauritius needs 100 models more of transportation equipment, 50 items of sugar have to be sacrificed. The opportunity cost is every additional device of travel equipment brings about a loss of half a unit of sugar. In the case of the EU, to get one more unit of sugar, four products of transport tools has to forgone and with an increase of a device of transfer equipment, 25 % of a product of glucose will be lost. Thus, Mauritius has a comparative edge in sugar and should specialise in its production as it gets the least comparative cost and the European union has a comparative gain in the creation of transfer equipment. They will both gain in specialisation and trade. Total development increase by 50 units.

Countries

Transport Equipment

Sugar

Mauritius

0

500

EU

800

0

World's production

800

500

Thus, there's a clear relation between your concept of Comparative Advantage and the PPC.

To conclude, there are many assumptions concerning both the concepts of International Trade and the Production Probability Curve. Notwithstanding these, there are a number of gains from International Trade and this can be represented on the PPC.

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