nations are assumed to be operating initially at some point on
their concave (or increasing opportunity cost) production possibility frontier
determined by domestic demand conditions. For example, consider the standard
two-country, two-commodity model. Let the two countries be “Less Developed
World” and “Rest of World” and the two commodities be agricultural
goods and manufactured goods. Figure 12.1 portrays the theoretical benefits
of free trade with Less Developed World’s domestic (no-trade) production
possibility frontier shown in Figure 12.1a and Rest of World’s frontier in
Figure 12.1b. Point A on the Less Developed World production possibility
frontier PP in Figure 12.1a provides the illustration. With full employment of
all resources and under perfectly competitive assumptions, Less Developed
World will be producing and consuming at point A, where the relative price
ratio, Pa/Pm, will be given by the slope of the dotted line, (Pa/Pm)L, at point
A.14 Similarly, Rest of World may be producing and consuming at point in
Figure 12.1b, with a domestic price ratio, (Pa/Pm)R, that differs (agricultural
goods are relatively more costly, or conversely, manufactured goods are relatively
cheaper) from that of Less Developed World. Note that with a closed
economy, both countries will be producing both commodities. However, Less
Developed World, being poorer, will produce a greater proportion of food
products in its (smaller) total output.