Question

1. Is it possible for trade to take place in the Classical world of David Ricardo without complete specialization of production in both countries? If so, when? Who will receive the gains from trade in this instance? Why?

2. It has been argued that the effect of trade in goods and services has the same effect on factor income distribution in a country as would be the case if factors were completely mobile internationally. What is the reasoning behind this argument?

3. Two of the strong assumptions underlying the H-O model are zero transportation costs and perfect competition. Explain how the presence of each might alter any of conclusions reached in the basic H-O approach

Answer 1

1.

In Ricardian framework of comparative advantage main assumptions are absence of any transport cost and one factor of production. In real world of trade, transportation cost exists and that rises the cost of export. In this case, foreign country may choose to produce that good in own country rather than import as the price is higher due to addition of transport cost. The amount of export from home country may be discouraged. However, home country may still import goods from foreign country at cheaper rate and export the goods having less transport and other costs. It is the implication that the volume of trade may decrease if considering this case.

In this instance foreign will receive the gains from trade as it is beneficia by not importing at higher price rather producing at home at cheaper rate and production gain by exporting goods to the countries having high demand for the products.