Increasing Opportunity Costs and Trade

Increasing Opportunity Costs and Trade - Each country...

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Increasing Opportunity Costs and Trade The Ghana/Peru example assumes constant costs which should result in total specialization. The world fails to show total specialization. This would result if there were increasing opportunity costs so that the PPC is concave. In the absence of trade, each country consumes at their point A. Slope of tangent line gives the cost ratio. As long as the slopes are different there is an incentive to trade.
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Unformatted text preview: Each country produces where the world price ratio line is tangent to its PPC (point B). At point B, the world price equals the domestic opportunity cost. Then, they trade to end up consuming at point C. The consumption point depends on preferences, but we'll bring those in later....
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Increasing Opportunity Costs and Trade - Each country...

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