Key Terms
01.Autarky Autarky is the quality of being self-sufficient. Usually the term is applied to political states or their economic systems. Autarky exists whenever an entity can survive or continue its activities without external assistance or international trade. If a self-sufficient economy also refuses all trade with the outside world then it is called a closed economy. 02.Community indifference curve A community indifference curve shows the various combinations of two commodities that yield equal satisfaction to the community or nation. Higher curves refer to greater satisfaction, lower curves to less satisfaction. Community indifference curves are negatively sloped and convex from the origin. To be useful, they must not cross. 03.Deindustrialization Deindustrialization is a process of social and economic change caused by the removal or reduction of industrial capacity or activity in a country or region, especially heavy industry or manufacturing industry. It is the opposite of industrialization.
04.Equilibrium-relative commodity price in isolation The equilibrium-relative commodity price in isolation is given by the slope of the common tangent to the nation’s production frontier and indifferent curve at the autarky point of production and consumption.
Thus, the equilibrium-relative commodity price in isolation is PA =PX/PY=1/4 in Nation 1 and PA’ =PX/PY=4 in Nation 2.(see Figure 3.3) 05.Gains from exchange 06.Gains from specialization 5-6.
A nation’s gains from trade can be broken down into components: the gains from exchange and the gains from specialization. 07.Incomplete specialization Incomplete specialization means production of goods that compete with imports. In contrast, under increasing opportunity costs, there is incomplete specialization in production in both nations. 08.Increasing opportunity cost Increasing opportunity cost mean that the nation must give up more and more of one commodity to release just enough resources to produce each additional unit of another commodity. 09.Marginal rate of substitution (MRS) The MRS of X for Y in consumption refers to the amount of Y that a nation could give up for one extra unit of X and still remain on the same indifferent curve.
MRS = (Absolute)Slop of community indifference curve 10.Marginal rate of transformation (MRT) MRT of X for Y refers to the amount of Y that a nation must give up to
produce each additional unit of X.Thus, MRT is another name for opportunity cost of X (the commodity measured along the horizonal axis) and is given by the (absolute) slope of the production frontier at the point of production.
MRT（X for Y） = Opportunity cost of X =(Absolute)Slop of the production frontier
11.Revealed comparative advantage The revealed comparative advantage is an index used in international economics for calculating the relative advantage or disadvantage of a certain country in a certain class of goods or services as evidenced by trade flows. It is based on the Ricardian comparative advantage concept.
Question for Review
1.In what way is the material in this chapter more realistic than that of Chapter 2？
Chapter 3 extends our simple trade modle to the more realistic case of increasing opportunity cost .Taste or Demand preferences are introduced with commodity indifference curves
2.How are the taste or demand preferences ,of a nation introduced in this chapter？Why are they needed？
In a nation,the tastes or the demand preferences are given by community （or social）indifference curves. Because they differ on the assumption that tastes ,or demand preferences ,are different in the two nations
3.Why does a production frontier that is concave from the origin indicate increasing opportunity costs in both commodities？what does the slope of the production frontier measure？How does the slope change as the nation produces more of the commodity measured along the horizontal axis？more of the commodity measured along the vertical axis？ That’s always the case because as a nation consumes more of X ,it must consume less of Y if the nation is to have the same level of satisfaction. The slope of the production frontier is measured by the marginal rate of substitution(MRS) The more of X and the less of Y a nation consumes, the more valuable to the nation is a unit of Y at the margin compared with a unit of X. The slope tends to be flater
4.What is the reason for increasing opportunity costs？Why do the production frontiers of different nations have different shapes？
The reason is that by the trading with each other, both nations end up consuming more than in the absence of trade.Because different nations incur increasing opportunity costs in the different productions.This is reflected in the increasing slope of their production frontier
5.What does a community indifference curve measure？What are its characteristiics？What does the slope of an indifference curve measure？Why does it decline as the nation consumes more of the commodity measured along the horizontal axis？
The community indifference curve is measured by income distribution
and consumption pattern. The community indifference curves must not intersect,their slope is negative. The slope of community indifference curve are measured by the marginal rate of substitution,too.Declining MRS means that community indifference curves are convex from the origin.Thus, while increasing opportunity cost in production is reflected in concave production frontiers,a declining marginal rate of substitution in consumption is reflected in convex community indifference curves. 6.What difficulties arise in the use of community indifference curves in trade theory？How can these difficulties be overcome？
The difficulties ---A particular set，or map,of community indifference curves refers to a particular income distribution within the nation.A different income distribution would result in a completely new set of indifference curves,which may intersect precious indifference curves. The so –called compensation principle and restrictive assumption are used to overcome them but don’t completely eliminate all the conceptual difficulties inherent in using community indifference curves
7．What is meant by the equilibrium-relative commodity price in
isolation? How is this price determined in each nation ? How does it define the nation’s comparative advantage?
The equilibrium-relative commodity price in isolation is given by the slope of the commom tangent to the nation’s production frontier and indifference curve at the autarky point of production and consumption.