Aspects of goods that reflext location.
We are interested in not only to explain the trade among nations, but also the pattern of trade.
Edgeworth boley diagram for exchange economy (no production, just initial endowments) tells us there ared two reasons why people would wish to trade.
1. Differences in endowments
2. Differences in preferences (indifference curves)
3. If production is possible then differences in technology
Two goods X and Y produced
Two factors land and labour, both internationally immobile
Each of two countries draw producton possibility set.
We assume same utilities and technology, but diffenet initial endowment. A is better producing Y.
How do we knkow that trade occurs?
1. From edgeworth boley
2. The price ratios are different - people would wish to buy from the cheaper country
1. Slopes must be the same
2. Afterwards the consumption must remain the same in total