This constraint states that the value of Home’s consumption over the two periods (measured in terms of present consumption) equals the value of consumption goods produced in
the two periods (also measured in present consumption units). Put another way, production
and consumption must lie on the same isovalue line.
Point D, where Home’s budget constraint touchesThis constraint states that the value of Home’s
consumption over the two periods (measured in terms of present consumption) equals the value of consumption goods produced in
the two periods (also measured in present consumption units). Put another way, production
and consumption must lie on the same isovalue line.
Point D, where Home’s budget constraint touches
This constraint states that the value of Home’s consumption over the two periods (measured in terms of present consumption) equals the value of consumption goods produced in
the two periods (also measured in present consumption units). Put another way, production
and consumption must lie on the same isovalue line.
Point D, where Home’s budget constraint touchesHow does international trade enter the story?
Consumers in each country will still want
to consume a variety of goods. Suppose that industry 1 ends up in the United States and
industry 2 ends up in Britain; then American consumers of good 2 will have to buy goods
imported from Britain, while British consumers of good 1 will have to import it from the
United States. International trade plays a crucial role: It makes it possible for each country
to produce a restricted range of goods and to take advantage of economies of scale without
sacrificing variety in consumption. Indeed, as we will see in Chapter 8, international trade
typically leads to an increase in the variety of goods available.