Lecture Slides Chapter 02.international
Lecture Slides Chapter 02.international
Lecture Slides Chapter 02.international
PPS - various
combinations
of two goods
that a nation
can produce
using all
available factor
inputs
Marginal Rate of Substitution (MRT)
o amount of one good a country must sacrifice to
get one more unit of another good
o synonymous with opportunity cost
o equal to the absolute value of the slope of the
production possibilities schedule
o MRT = ∆ good Y
∆ good X
MRT (cont.)
In this graph
the MRT
equals 0.5
because wheat
output falls by
20 when auto
rises by 40
Basis for Trade
o The MRT or opportunity cost for each nation
will indicate the direction of trade.
o The MRT or opportunity cost can also indicate
the potential gains from trade.
o We begin with an assumption of constant
opportunity costs.
o Benefits will be measured in terms of both
improved production and consumption.
Gains from Specialization