3 - The properties of the set of production possibilities with pure intermediate products

Abstract

The shape of the production-possibility set crucially affects the theories of welfare economics and international trade. In particular, the convexity property of the production set plays an important role in the analysis of factor price equalization and in the proof of the Heckscher–Ohlin theorem. Even if convexity is assured, there still remains another difficulty arising from the flatness of its frontier. This chapter discusses a special case in which there exists a category of pure intermediate goods. Such goods have been figured prominently in the literature on effective protection. In particular, that chapter explains how to derive the necessary and sufficient conditions of any assigned degree of flatness in the production frontier. As a by-product, the non-substitutability of pure intermediate goods is also shown.