# MGEC62H3 Lecture Notes - David F. Swensen, Indifference Curve, Autarky

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Published on 9 Oct 2012
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Diagram 2
Suppose that another large country offers to trade with us at price Pw. Our country will
trade to reach the highest indifference curve possible where the indifference curve is
TANGENT to the new line - there is only one of these points.
How do we trade?
We export ED hockey sticks and import D1C1 tuques
Trade triangle is ED,C Legs of triangle are exports and imports and the hypothenuse is
the price ratio
Exercise: draw flatter price line
Algebraic catch up
Maximize utilitiy U(eh,ct) Subject to a constrained (budget line)
- Get to the highest indifference curve possible
- Budget line: value of goods consumed = value of endowment
- ( Ph)Ch + (Pt)Ct = (Ph)eh + (Pt)et = I
- Ptct - Ptet = pheh-phch
- pt(ct-et) = ph(eh-ch)
- ct-et = ph/pt (eh-ch)
- the only thing that matters is the relevant price
- value of imports = value of exports
- imports: ct-et
- take endowment buy use income to buy goods
- consuming endowment is always feasable
- consume our endowment
- countries can always afford autarky
Russia: relatie price of hockey stilck ( Ph/pT) in 5
Canada: Ph/Pt = 3
Look at diagram 3
Endowment Model - Income Distribution
SO, a country is unambiguously better off after trade in this model. What about
individuals within the model
2 individuals with identical preferences ( Rudolph and Shareen )
Case D Autarky - Same individual endowments
Autarky: no international trade
R(eh, et) = (2,2)
S(eh,et) = (2,2)
Case 2 Autarky Different Individual Endowments
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## Document Summary

Suppose that another large country offers to trade with us at price pw. Our country will trade to reach the highest indifference curve possible where the indifference curve is. Tangent to the new line - there is only one of these points. We export ed hockey sticks and import d1c1 tuques. Trade triangle is ed,c legs of triangle are exports and imports and the hypothenuse is the price ratio. Maximize utilitiy u(eh,ct) subject to a constrained (budget line) Get to the highest indifference curve possible. Budget line: value of goods consumed = value of endowment. The only thing that matters is the relevant price. Value of imports = value of exports. Take endowment buy use income to buy goods. Russia: relatie price of hockey stilck ( ph/pt) in 5. So, a country is unambiguously better off after trade in this model. 2 individuals with identical preferences ( rudolph and shareen )

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