All Terrain Thinking

A Compendium of things I think are Important

Economics: It's not just whats' in your wallet

The Deal!

What can you do to improve the position of both Empires? What if you suggested a one-for-one trade of luxuries for necessities? This will work because it is somewhere between the two isolation price ratios. We could show this as the red lines in the diagram below. At these prices (slope=-1), the 'trade' possibility line would be outside of the production possibility line. If the Empires specialized in what they did best (A in L and B in N), then they could trade back along the red consumption possibility lines. In doing this they would each be able to reach points that were unreachable without any trade. For example, without any trade Empire A could consume (produce) 10 units of L and 5 units of N. With trade, however, it would be possible to consume 10 units of L and 10 units of N. With trade it was possible to increase consumption of N without any reduction in consumption of L. What this analysis of trade has done is extend the concept of specialization beyond national boundaries. It is at the heart of the proponents of the free trade movement that has been reflected in the international agreements (GATT and WTO) and regional agreements (NAFTA), but we will explore this in more detail when we examine international trade in more detail.

But, how do we make this trade a reality? How are we to facilitate the necessary trades now that each empire is no longer self-sufficient? One solution would be the price system which is explored in the supply-demand section. 

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