Home Country | |
| Imagine we have an economy with two goods, X and Y. We will indicate the level of endowment of goods X and Y to country H (Home) using XH and YH, respectively. |
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The endowment of XH units of X and YH units of Y
gives country H a certain level of satisfaction or utility. If H had
fewer units of Y,
for example Y'H, then to achieve the same level of satisfaction H
will need more units of X, as indicated by X'H.
Likewise, with fewer units of X, more units of Y are needed to maintain the same level of satisfaction. If we connect all the points that give H this same level of satisfaction (or utility), we will have a curve, IH, known as the indifference curve. |
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If H is able to move to a point above the line IH,
for example by increasing endowment of both X and Y to X''H and
Y''H respectively, then H's level of satisfaction has increased,
and can be represented by another indifference curve I''H.
There are many other such curves above and below IH, all connecting
points of equal satisfaction.
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Foreign Country | |
| Like H, country F (Foreign) has indifference curves. We'll denote F's endowment of goods X and Y with XF and YF, and F's indifference curve with IF. |
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