Interpret the “neoclassical” trade diagram

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Business Finance

  • Interpret the “neoclassical” trade diagram below (on the next page):

a.What is the meaning of the curve that goes through points F and G? What can we infer from the fact that this curve gets steeper as the quantity of laptop computers increases?

b.What is the meaning of the curves U0 and U1? the tangency points G and E?

c.Assuming that the country’s resources are fully employed, what are the quantities pro- duced in autarky? with free trade?

d.What are the quantities consumed in autarky? with free trade?

e.What are the volumes (quantities) of imports and exports with free trade? Where is the “trade triangle” on this diagram?

f.What is the meaning of the slope of the line FE (in absolute value, i.e., ignoring the fact that it’s negative)? In what units is this slope measured?

g.What would be the meaning of the slope of a line drawn tangent to the production possibility frontier at point G? Why would this line be steeper than line FE? (HINT: in which good does this country have a comparative advantage? How do you know?)

h.How do we see the “gains from trade” on this diagram?