a Standard model of a Trading Economy Production Possibilities and Relative Supply Assumptions of the model Each country produces two goods, food(F)and cloth(C Each countrys production possibility frontier is a smoo oth curve(IT) The point on its production possibility frontier at which an economy actually produces depends on the price of cloth relative to food, PdP Isovalue lines Lines along which the market value of output is constant Copyright C 2003 Pearson Education, Inc Slide 5-6Copyright © 2003 Pearson Education, Inc. Slide 5-6 A Standard Model of a Trading Economy ▪ Production Possibilities and Relative Supply • Assumptions of the model: – Each country produces two goods, food (F) and cloth (C) – Each country’s production possibility frontier is a smooth curve (TT) • The point on its production possibility frontier at which an economy actually produces depends on the price of cloth relative to food, PC /PF . • Isovalue lines – Lines along which the market value of output is constant