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Unformatted text preview: Model predicts pervasive specialization. One country (or perhaps both) specializes in production when allowed to trade. Move forward to look for a more complete model of trade. PPF is concave from the origin. What are the implications of a concave PPF?Slope of the PPF is not constant.The opportunity cost of producing good x or y increases as more of that good is produced. Concave PPF means Increasing Opportunity Cost. What are the implications of increasing opportunity cost?Assume Px/Py = 1Economy is producing at point A where slope of PPF = 1/4 To produce one more unit of x we must give up 1/4 unit of y. Better to produce one more x than to stay at point A.Continue to produce good x until opportunity cost yx > Px/Py. Therefore, equilibrium is where the absolute value of the opportunity cost (slope of PPF) of x is equal to the price of x in terms of y....
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This note was uploaded on 10/04/2011 for the course EC 340 taught by Professor Ballie during the Spring '10 term at Michigan State University.
 Spring '10
 BALLIE
 International Economics

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