World Production Possibility Frontier

Rich aristocrats served as the role model for the emerging middle class. Pratically all land in Italy (south of Florence) were owned by 30 patrician families who used slave labor, and free men were not able to compete with them in farming, and were forced to engage in trade and other businesses, thus forming the emerging middle class in the first century AD. Their system demonstrated that hard work and shrewd business can produce wealth and the rich can acquire social status. Shrewed slaves were often able to buy freedom from the money they earned in business. After the collapse of the Roman Empire, travels once again became more hazardous for several centuries. A thousand years later, Venice became the shipbuilding center of the world.

The middle class began to take jobs in other occupations, thereby producing a variety of goods and trading with others. The number or variety of goods increased. Roman citizens mostly consumed porridge before. Meat was rarely consumed unless one is desperate. Now they began to consume a variety of new foods, fruits and grains from other regions (grains from Egypt), and other luxuries (glass from Syria and oysters from England). (Trade increases varieties of goods.)

(i) Emergence of the middle class ⇒ trade volume increased

Because of huge price differences between regions, international trade has enabled traders to accumulate wealth. The Romans conquered the Mediterranean world and built the road, connecting various nations they controlled, and unwittingly ensured the safety of travelers and merchants.[This means a decline in travel risk and transportation costs, the most significant trade barrier in ancient times.] They accumulated wealth through trade and the Roman soldiers were well paid for their service. Free bread was distributed to spectators at gladiator games.

Trade contributed to slavery and income inequality, especially in the early stages of world civilization.(Medical doctors and learned Greek teachers were mostly slaves.) However, income inequality also stimulates profit motives and economic growth.

(ii) via Appia, via Ignatia etc. ⇒ road construction of 51,000 miles throughout the Empire reduced crimes, thereby reducing the transportation costs.

During the time of Augustus, for the first time it was relatively safe for people to travel and people enjoyed traveling, much as Americans began to travel after the middle class were able to acquire auomobiles. As a result, trade expanded throughout the Mediterranean world. Apostle Paul's missionary journeys are a good testimony indicating that the middle class traveled widely throughout the Roman Empire. There were many bandits [Mark did not follow Paul on his missionary journeys for this reason.] and pirates in the Mediterranean, but it was much safer than before. Without safe transportation it was difficult for countries to ship goods to other parts of the Empire.

Octavian received the title of Augustus in 27 BC and became the first Emperor. He and Livia did not have their own children. Livia's son from her previous marriage, Tiberius, became the next emperor, but Augustus and Tiberius were joint rulers for 2 years (AD 12 - 14). Tiberius became the emperor on August 19, 14 AD when Augustus died.

(iii) Pompeii eliminated the pirates in the Mediterranean Sea.

(ii) + (iii): transportation costs declined. Merchants propered. Rome used taxes to build roads.

A country's production possibilities are the area on or below the production possibility frontier (PPF). How do we add the production possibilities of two countries with different possibilities?

In the two-good world, a country's production possibilities are the triangular area in Figure 14. We are mostly concerned with the outermost possibilities or the PPF. It consists of two endpoints and all the points in between.Two endpoints indicate the absence of one good (meaning one good is not being produced) and the country specializes in one good.

 Diversification

or specialization

Diversification vs Specialization

Diversification: A country produces all goods.

Specialization: A country produces only a few goods.

Figure 14. Specialization versus Diversification

Assume: The US has a comparative advantage in commodity 1, i.e.,

the PPF of UK is steeper than that of the US.

Figure 15. Production possibility curves of the two countries

Any production possibility (a combination of Y₁ and Y₂) is actually a vector from the origin (0,0) to (Y₁,Y₂).
Of course, two production vectors, say (1,2) in the UK and (3,7) in the US can be added, and the sum is (1+3,2+7) = (4,9). (More on vector addition later.)

Of course, it is also possible to add one UK prodution, say (1,2) to all US possibility points such as (4,1), (3,2), (2,3),... [Here, ... means "etc." or "so and so on," when the writer wants to list only a few examples rather and does not want to present a complete list.]

(1,2)+(4,1), (1,2)+(3,2), (1,2)+(2,3), ... = (5,3), (4,4), (3,5), ...

Although it is considerably more complicated, it is possible to add all UK possibility points to all US possibility points. One has to repeat the above process for each and every US production possibility point. This physical process of adding all UK possibility points to all US possibility points can be tedious, to say the least. But there is no point in carrying out this laborious task, because a graphical method is much easier for completing this task. (Actually, it is the area below (1) R (2) and above Y₁ axis and to the right of Y₂ axis.)

Moreover, we are not concerned with all production possibilities below the triangles, but the world production possibility frontier (WPPF).

To obtain WPPF, slide the production bloc of UK along the PPF of the US.

(1) On the blue segment, US diversifies, and UK specializes in y₁.

(2) On the green segment, US specializes in y₂, and UK diversifies. (undesirable possibilities)

(4) On the segment RB, US specializes in y₁, and UK produces both goods. At point R (Ricardo point), each country specializes in the good in which it has a comparative advantage.

1. a_L1/a_L2 < a*_L1/a*_L2 (HC has a CA in commodity 1),
   
2. a_L1/a_L2 < p*₁/p*₂ < a*_L1/a*_L2

   (The relative price of 1 lies between those in autarky in the two countries)

then the Ricardo Point (where each country specializes in the commodity in which it has a comparative advantage) maximizes NDP, NDP* and NWP.

(2) Ricardo Theorem holds even when a country has absolute advantages over another in all industries.

Trade requires safe navigation of merchant ships. For the first time in history, Ptolemy, one of the four generals of Alexander the Great, built in Alexandria a lighthouse, which was one of the Seven Wonders of ancient times. (Trade promotes new innovations.) The existence of lighthouses also is evidence of substantial gains from trade.

Painted wall in a Roman villa. Abundance of murals and mosaics in Roman villas implies abundance of slaves or cheap labor. Riches of the world flowed into Rome, and the wealthy bought villas in coastal cities such as Pompeii and Hercolanum (which were covered by the dust of Mt. Vesuvius, then active volcano around AD 70). The Roman Empire became a common market (a subject to be studied shortly).

Cretans in the Knossos Palace invented a plumbing system, carrying the sewage from the palace to outside. The Romans copied this technology from Cretans, and began to use indoor plumbing extensively. Indoor plumbing was not adopted in American until the 19th century. Without these modern facilities, people used outhouses, and people took bath infrequently, not even once a year, even in America. Indoor plubming is one of the most important indicators, if not the most important, of civilized people. Western countries also borrowed the Roman system of government.

Theodora and her Christian retinue

Theodora, Maximianus and Justinian

Mosaics of St. Vitale, Ravenna. Ravenna became the seat of the "Roman Empire" after the fall of the (Western) Roman Empire in 476 AD. Of these mosaics, it is said:

"[N]o other work of art . . . conveys the spirit of Byzantium with so much eloquence as do these two mosaics." (von Simson)" Upon Empress Theodora's request, Emperor Justinian built this churc of St. Vitale.

Reproduced in Archeological Diggings, vol 12, August/September 2005, p.29.

The bottom mosaic shows portraits of Theodora and Justinian (527-65 AD) with Maximianus, the bishop of Ravenna in between.