GFT, TOT, Offer Curve, TIC

Components of GFT

pa

p*

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 Components of GFT

Point Ea to C’ is EXCHANGE/CONSUMPTION gain.

Point C’ to Cpt is SPECIALIZATION/PRODUCTION

gain.

Factor Endowment Model ⇒ L-shaped CIC’s: GFT =

Production Gain and Consumption gain = zero.

Commodity Endowment Model ⇒ Box PPC: GFT =

Consumption Gain and Production gain = zero.

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 Factor Endowment Model

GFT > 0; GFT = Production Gain; Consumption Gain = 0

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 Commodity Endowment Model

GFT > 0; GFT = Consumption Gain; Production Gain = 0

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 PPC and PPF

The locus of tangency points of the X and Y-Isoquants is

called the CONTRACT CURVE or PRODUCTION
CONTRACT CURVE.

Any point NOT on the PCC is NOT an EFFICIENT

production possibility.

PPF is obtained via simple transposition of the PCC in the

output plane or X-Y PLANE

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Sunandan Ghosh, CDS, 2013 7
 Commodity TOT

Ratio of the price of its export commodity to the price of

its import commodity (1/2).

TOT of partner will be just the reciprocal (2).

Multi-commodity: TOT ⇒ price index of export basket to

that of import basket.

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 Offer Curve

Edgeworth – Marshall, Meade.

Reciprocal demand curves.

Locus of different combinations of import demand and

export supply of a country at different TOT’s that
maintain trade balance.

Home: locus of p*M = X

Foreign: locus of p* X * = M *

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 Home’s OC given CA in good-X

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 Elasticity of Import Demand and OC

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 Elasticity of Import Demand and OC

Elasticity of import demand at any point on the Home OC is given by

Mˆ Mˆ 1 1 1
ε = − = − = = =
Pˆ Xˆ − Mˆ Xˆ 1− (
dX dM
1−
dX M
1− / )
Mˆ X M dM X

Similarly we have elasticity of import demand at any point on the Foreign OC

by ε *

Walrasian Stability (Marshall – Lerner Condition) is given by

ε +ε >1
*

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 Equilibrium

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 TIC

James Meade

Locus of all trade combinations (X, M) among which a

nation is indifferent

Tangency between TOT and TIC gives the optimal trade

offer given that TOT.

The locus of all such optimal trade offers is OC

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 TIC

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 Optimal Trade Offers

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