Are the net gains from trade positive? (demonstrate using a two-country, two-commodity model)

Expert Solution

Yes, Net gains of trade is possible in two country to commodity model when countries are having comparative advantage on the production of commodity.

We assume If country A uses less labour to produce wheat and requires more labour to produce sugar.

Country B uses more labour than country A to produce wheat and requires less labour to produce sugar.

Then in this case both countries can gain from trade if country A exports wheat to country B and country B exports Sugar to A.

Both nations can gain if country specialises in production of wheat and country B specialise in production of sugar.

Example:

Wheat- US-6, UK-1

Cloth- US-4, UK-2

US has absolute advantage in both commodities but comparative advantage in wheat as ratio with US, Wheat has more.

Both countries can gain if US specialises in Wheat and UK specialises in cloth.

Overall production in both the countries will rise due to gains from trade.

Rahul Sunny answered 6 months ago

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