Given a two country (A & B) and two goods (X & Y) model with identical endowments:
Draw the PPF for country A that displays increasing opportunity costs and also shows that country A produces more of good X.
In the same graph, draw the PPF for country B that displays increasing opportunity costs and also shows that country B produces more of good Y.
Now draw a trade line that is tangent to BOTH PPFs (i.e. the trade line touches the PPF’s at one point). Assume that the slope of the trade line is the world relative price of the two goods. Does trade occur given the above information? If so, how is it different from question 1 analysis (hint: the tangency points are the country’s production points. Look at the graph for the answer).
Explain why increasing opportunity costs occur within an economy, how this affects the PFF and therefore trade.