Trade and General Equilibrium

Abstract

The transformation curve (or concave production-possibility frontier) was introduced into trade theory by Enrico Barone in 1908, but for various reasons his contribution went unnoticed. Twenty-two years later, Haberler reintroduced the construction under the label of ‘production substitution curve’. It was a diagrammatic representation of a country’s maximum attainable set of outputs for two commodities from a given supply of productive factors, and described the rate at which commodities could be substituted for each other not only under constant opportunity-cost conditions, but also under increasing and decreasing casts as well.¹ Under increasing costs (the assumption frequently made) the production-possibility frontier is drawn strictly concave to the origin, i.e. the production possibility set is convex, reflecting the law of diminishing marginal productivity.