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Unformatted text preview: The good in the numerator is relatively cheaper than the good in the denominator in the country with the lowest relative price. What determines relative price in Autarky? Qsocks 600 200 Qtshirts PPF shows how many socks can be produced given the number of t-shirts we produce. In Autarky, Pt/Ps is the absolute value of the slope of the PPF where t is on the vertical axis and s is on the horizontal axis. Relative price is the same as opportunity cost in this case. If Pt/Ps is greater than opportunity cost then the producer specializes in t. If Pt/Ps is less than opportunity cost then the producer specializes in s. The only way for this economy to produce both goods is if Pt/Ps = 3. Now consider that under trade, Pt/Ps = 5. Home (Pt/Ps = 3) only produces t-shirts and foreign (Pt/Ps = 10) only produces socks. (See diagram online) In Autarky, Consumption Frontier and PPF are the same thing. In Trade, CPF lies outside PPF except at on point....
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