International Trade - Theory and Policy, 2010a

U.S. exports of steel must equal French imports of steel (EXS = IMS∗) and French exports of clothing must
equal U.S. imports of clothing (EXC∗ = IMC). In other words, the U.S. trade triangle formed by EXS, IMC,
and the U.S. national income line must be equivalent to France’s trade triangle formed by EXC∗, IMS∗, and
the French national income line.
KEY TAKEAWAYS
The line tangent to the free trade production point on the PPF represents the national income line and has
a slope equal to the terms of trade.
The consumption point in a free trade equilibrium is found as the tangency point of the highest national
indifference curve along the national income line tangent to the production point.
The pattern of trade is shown as the exports and imports needed to move from the production point to the
consumption point.
EXERCISE
1. Jeopardy Questions. As in the popular television game show, you are given an answer to a
question and you must respond with the question. For example, if the answer is “a tax on
imports,” then the correct question is “What is a tariff?”
1. The term used to describe the slope of the national income line in a two-good,
variable proportions H-O model.
2. In a two-good, variable proportions H-O model, this occurs where the national income line is
tangent to the PPF.
3. In a two-good, variable proportions H-O model, this occurs where the national income line is
tangent to an indifference curve.
4. In a two-good, variable proportions H-O model, these form the base and height of the triangle
between the production and consumption points on the PPF diagram.
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