Figure (a) for Norway Figure (b) for Sweden PPF of Norway & Sweden PPF N and PPF S indicate the different combinations of fish and automobiles that can be produced within the given resources of each country. It is to be noticed that PPF N will be a steeper one implying that the country is relatively more productive in fishing and PPF S will be a flatter one implying the country is relatively more productive in automobiles. In the absence of trade, the economy of the Norway and Sweden will produce at a point on the respective PPF s where it is tangent to the respective highest possible isovalue line (a line along which the value of output is constant and whose slope is equal to minus the ratio of relative price of the two goods). As, we know that the value of an economyâ€™s consumption equals the value of its production, so the production point and the consumption point must lie on the same isovalue line. Therefore, in a pre-trade situation, at the point of tangency between PPF S and isovalue lines, the respective highest indifference curve will also be tangent which is shown by point E in figure (a) for Norway and in figure (b) for Sweden.
When trade is opened between the two countries, the isovalue lines in Norway and Sweden will shift as shown in the respective figures in red color. The movement of production and trade will move production from point E to point A in both the countries. At the new production point, both countries will be able to trade to a final consumption point (point B ) on a higher indifference curve IC 1 than the original indifference curve IC . At point B , consumers of both the countries are better off. At point B , Norwayâ€™s exports fish are matched by Swedenâ€™s imports of fish. In the same way, the amount of exports of automobiles of Sweden is matched by that of Norwayâ€™s imports. Thus, both Norway and Sweden gain from trade.
- Summer '16
- International Trade