Annex 2A


3) Importables and non-tradables are only for final consumption and not used as
 intermediates in the production process, while the exportables are completely exported
 and not domestically used.
4) As the price of tradables is given and fixed, the terms of trade (Px/Pm) are also fixed, and
 the exportable and importable commodity can be combined into a single composite
 tradable commodity (t) with price Pt (= Px/Pm). Although, by definition, consumption
 only relates to importables (see 3), it may be either be directly related to domestically
 produced importables, or indirectly through the production of exportables which are
 exchanged for the same value (assuming a current account balance) of imported consumer
 goods.
5) Product and factor (labour and capital) markets are perfectly competitive and the
 economy produces at its production frontier. Labour is completely mobile in the short-
 run, (will shift from one sector to another according to the market conditions), while
 capital is sector-specific in the short-run and mobile only in the long-run.

2. Features of the macro-economic optimum and equilibrium

Figure 1 depicts an equilibrium situation which we use as the starting point of the analysis.
The axes indicate the quantity of tradable and non-tradable goods which are produced and
purchased (demanded) in an economy.

 Figure 1: Macro-economic equilibrium

 tradables



 E


 C







 SB-D> non-tradables
 0 nt B D

 The curve BC represents the production transformation curve. It traces all possible
 combinations of tradable and non-tradable goods which may be produced in the economy,
 given the available natural resources, production factors and technology. It is also called the
 production frontier or production possibility curve, as it is the locus of maximum production
 combinations at full employment of all production resources. If all productive resources were
 devoted to the production of non-tradables, the quantity B could be realized; if only tradables
 were produced, the quantity C could be realized, or any combination of n and t on the curve


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