Question

Suppose a country is exporting good X and importing good Y at current world prices.

a. Draw and carefully label a PPF-indifference curve diagram showing this situation.

b. Explain, in both words and in a copy of your graph from part a., how a change in consumer tastes, everything else held constant, can cause this country to:

i) not trade anymore and

ii) become an importer of good X and exporter of good Y.

Answer 1

1. Production Possibility Frontier (PPF) shows the combination of goods that a country is capable of producing given the limited resources available to it at a specific time period with all its resources fully and efficiently used.
   
2. The PPF is also called the production possibility curve (because usual examples have only two goods), opportunity cost curve, or transformation curve.

b) Everything held constant can lead a country go not trade anymore as increase In prices of the goods can lead to decrease in imports and increase in exports because any logical person would like to sell it's commodity when the price is higher and any logical buyer would like to buy a commodity when the price is lower. Hence increase in price, keeping other factors constant can lead to a situation where a country would trade no more.

we know if the price of a certain good increases , the demand for that good decreases so if the country is importing that particular good, then they will suffer losses and no country would like to fall in such a situation and thus on increase of prices, the country could start producing or manufacturing those goods and start exporting them for higher profits and vice-versa in the case of decreasing of prices.

Thus due to change in pieces the whole scenario can change as well .