Kemp's Model
If the opening of the country to trade leads to a TOT line steeper than TOT1, the country will completely specialise in X by producing at N.
If the TOT line is flatter than TOT2, the country will completely specialise in X by producing at N.
If the TOT line falls in between TOT1 and TOT2, it is unclear where this country produces. However, even in this case, a complete specialisation will give a higher utility by trade.
Krugman's Model: based on "monopolistic competition"
c -> per capita consumptionpp -> the relationship between the price of the good and marginal cost. (As consumption increases, demand becomes less elastic.)
with constant marginal cost, P
for profit
maximisation. Therefore, pp is upward sloping.)
zz -> zero economic profit in the long run.
`pi = 0' means Tk = TC or Tk - TC = 0.
pQ - (a + bQ)W = 0
where (a + bQ) is the labour requirement for producing Q.
p/W = (a + bQ)/Q
p/W = b + a/Q where Q = c.L (total output = per capita consumption x total labour)
By trade, market sizes increase for each firm. As the market size increases, cost decreases by EOS.
As the increase of the market size means L
, zz curve will shift down to zz'.
