Brief notes on the concept of Equal Cost Difference

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Since the two countries have the same cost ratio, no incentive for trade exists. In spite of the fact that India is capable of producing both commodities more cheaply than England, it will export any commodity to England only if it can get more than 1 Wheat = .5 Cloth (i.e., India’s domestic barter rate).

But, on the other hand, England, will not import any commodity from India if it cannot get it at a price less than 1 Wheat = .5 Cloth (i.e., England’s domestic barter rate). Thus, at equal cost differences, no country will be motivated to enter into trade with the other.

The non-possibility of trade under equal cost difference condition is diagrammatically represented. 1A, lines II and EE arc the production possibility curves for India and the England respectively.

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The slopes of these curves represent the relative costs of production of wheat and cotton in India and England respectively. The production possibility curves are straight lines which show that the production is subject to the law of constant costs in both the countries.

The relative position of II and EE curve shows that India can produce both wheat and cloth at a cheaper rate than England.

But both the production possibility curves are parallel to each other, i.e., the slope curves are the same which means that both India and England have the same cost ratio.

This indicates that there is no scope for trade between the two countries and specialisation by any country in any product will not be advantageous.

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Fig IB illustrates the same idea with the help of offer curves. Line 1 = E is the offer curve of India and England which represents that the cost ratio (or the domestic barter rate) in the two countries is the same (i.e., 1 Wheat = .5 Cloth).

The offer curve is a straight line which shows that it is drawn on the basis of the assumption of constant cost conditions.

In a situation of equal cost ratios, trade between the two countries is not possible because India wants more than .5 units of cloth for one unit of wheat, while England, on the other hand, wants to give less than .5 units of cloth for one unit of wheat imported.

Thus, if there is equal cost difference, there is no possibility of international trade and no country will gain by specialisation.

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