Marc-Andreas Muendler International Trade FREQUENTLY ASKED QUESTIONS JavaScript recommended

fall 2011: International Trade 101

Specific Factors Model (Ricardo-Viner model)

Q: In Lecture 4's Figure "Gains From Trade due to Endowment Differences" (page 11 of the pdf file), what do the dashed rays depict and what would they be in autarky?

A: The dashed ray with slope Q_M/Q_F denotes the home country's product mix, or production bundle, after free trade. The production mix before trade (in autarky), in contrast, would be the same as the consumption bundle before trade (in autarky). The autarky production choice is not depicted with a ray, but the black dot is there.
The dashed ray with slope Q*_M/Q*_F denotes the foreign country's product mix, or production bundle, after free trade. The production mix before trade (in autarky), in contrast, would be the same as the consumption bundle before trade (in autarky). The autarky production choice is not depicted with a ray, but the black dot is there.

Q: In Lecture 4's Figure "Gains From Trade due to Endowment Differences" (page 11 of the pdf file), what does the dotted ray (between the two dashed rays) depict and how do we place indifference curves?

A: The dotted ray is a way to order consumption bundles. You can, but need not, place indifference curves (utility levels) through the points where this dotted ray intersects with the boundaries of the relevant consumption sets. Before trade, the relevant consumption set is bounded by the production possibility frontier. After trade, the relevant consumption set is bounded by the consumption line.
The Figure only depicts indifference curves (utility levels) for the two countries before trade. The area above each indifference curve before trade and below the consumption line after trade is a measure of the gains from trade: all the consumption bundles that are strictly preferable to the bundle before trade and that are newly feasible after trade.