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                   Subject                ECONOMICS 
                   Paper No and Title     14: Economics of Growth and Development II 
                   Module No and Title    13: Static and Dynamic Gains from Trade 
                   Module Tag             ECO_P14_M13 
                   
                                                                                                    
                                              
        ECONOMICS                    14: Economics of Growth and Development - II 
                                     13: Static and Dynamic Gains from Trade 
                      
                                                                                                                        
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          TABLE OF CONTENTS  
            1.  Learning Outcomes 
            2.  Introduction 
            3.  Production possibility frontier (transformation curve) 
            4.  Opportunity Cost 
            5.  Relative commodity prices 
            6.  Demand 
            7.  Production and consumption equilibrium 
            8.  Gains from trade 
            9.  Staple theory of trade   
            10. Summary 
                  
           
           
           
           
           
                          
    ECONOMICS        14: Economics of Growth and Development - II 
                     13: Static and Dynamic Gains from Trade 
              
                                                                                                                                                                
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                     1.  Learning Outcomes   
                     After studying this module, you shall be able to 
                            Understand the Production possibility frontier (transformation curve) 
                            Understand the concept of Opportunity Cost, Relative commodity prices 
                            Demand, Production and consumption equilibrium 
                            Understand the concept of Gains from trade and Staple theory of trade   
                     2. Introduction  
                     Why do countries trade with each other? Not every can produce all the goods and services 
                     required by its residents because of the fact that resource endowments of the country are 
                     not in line with the needs of the country.  Difference in resource endowments of the 
                     countries creates the need for foreign trade.  Difference in resource endowments also lead  
                     to differences in relative price of a commodity in different countries, difference in resource 
                     endowments which cause in difference in relative prices create conditions for foreign trade.  
                     International trade helps the nation to gain from trade.  The gains from international trade 
                     can  be  categorized  as  (1)  Gains  from  international  exchange  and  (2)  gain  from 
                     specialization. 
                     For discussing gains from international trade we should first discuss certain concepts which 
                     will help us to properly explain the gains from trade. 
                      
                     3. Production possibility frontier (transformation curve) 
                     In order to explain this we make some assumptions; (i) resources are fixed (ii) technology 
                     is given (there is no change in technology) and (iii) nation can produce only two goods. 
         ECONOMICS                          14: Economics of Growth and Development - II 
                                            13: Static and Dynamic Gains from Trade 
                         
                                                                                                                       
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          Production possibility curve (frontier) shows all those combinations of two goods which 
          the nation can produce by most efficiently and fully utilizing all its factors of production 
          (resources).  The curve shows the frontier beyond which production cannot be carried on 
          with the resources and technology available to the country.  Fig 1 shows the production 
          frontier of the nation 1 with the resources available to it, the country can produce OA 
          amount of cloth or OB amount of wheat or it can produce combinations of wheat and cloth 
          if the resources are used for the production of both the goods.  Suppose the country choose 
          to produce the combination given by point E then it is producing ON amount of wheat and 
          OS amount of cloth.  If it reduces the output of cloth by EL units it can increase the output 
          of wheat by H units.  A point R represents a combination of ON units of wheat and OF 
          units  of  cloth.    The  nation  is  not  fully  utilizing  its  resources  without  decreasing  the 
          production of wheat and production of cloth can be increased because unutilized resources 
          are available.  Similarly without decreasing the production of cloth, production of wheat 
          can be increased.  Using the unutilized resources the nation can increase the production of 
          both the goods.  Production at point Q cannot take place.  If the nation produces OS amount 
          of cloth it can produce only ON amount of wheat with its resources.  The production of 
          wheat cannot be increased to OP units when the nation is already producing OS amount of 
          cloth.  Resources are not available to produce the combination shown by point Q. 
                                       
          Figure 1  14: Economics of Growth and Development - II 
    ECONOMICS       13: Static and Dynamic Gains from Trade