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

Solutions

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 1 week ago

Next > < Previous

Related Solutions

Graph and explain using the Ricardian model: Consumption gains from trade, Production gains from Trade. Assume...

Graph and explain using the Ricardian model: Consumption gains from trade, Production gains from Trade. Assume that the country is producing only goods X and Y, and that the international relative price of X is lower than the domestic relative price of X.

Once trade opens up in a two country two commodity model of the Heckscher-Ohlin theorem, what...

Once trade opens up in a two country two commodity model of the Heckscher-Ohlin theorem, what happens to the prices of the two commodities in each country? What happens to the returns to the factors of production in each country?

What is Comparative Advantage? Explain with an example of a two-country and two-commodity model.

1. The following are the implications about the Gains from Trade Model in the case of...

1. The following are the implications about the Gains from Trade Model in the case of 2 economies, EXCEPT: a) By specializing and trade based on Comparative Advantages, both economies can attain Efficiency and Optimality. b) Economies that are Labor abundant should specialize in the kind of production that is Labor intensive. c) Even if only one economy initially benefits from trade, a pareto optimal agreement where both economies benefit is likely to occur. d) If an economy has Absolute...

Moving from autarky to free trade generates gains for a country. What are the sources of...

Moving from autarky to free trade generates gains for a country. What are the sources of these gains and explain how each results in a gain for the country.

In the aggregate trade model, we showed that gains can be made from international trade. Exactly...

In the aggregate trade model, we showed that gains can be made from international trade. Exactly how does this work-that is, what are the gains exactly? Draw a graph that shows gains from trade (PPF and SIC graph). Draw your graph so that, when trade opens, production increase for the good on the vertical axis.

1. Describe the sources of gains from trade for the consumer in the monopolistic competition model...

1. Describe the sources of gains from trade for the consumer in the monopolistic competition model with differentiated products. Hint: there are two mechanisms at work. (3 points each). 2. Describe the gravity equation (for international trade, not physics) in detail and provide the formula (4 points).

Question 1 The following are the implications about the Gains from Trade Model in the case...

Question 1 The following are the implications about the Gains from Trade Model in the case of 2 economies, EXCEPT: a)By specializing and trade based on Comparative Advantages, both economies can attain Efficiency and Optimality. b)Economies that are Labor abundant should specialize in the kind of production that is Labor intensive. c)Even if only one economy initially benefits from trade, a pareto optimal agreement where both economies benefit is likely to occur. d)If an economy has Absolute Advantage in all...

True or False: A country can maximize its gains from trade by producing at the autarkic...

True or False: A country can maximize its gains from trade by producing at the autarkic equilibrium and trading at the relative world price. Justify your answer and explain with the help of a properly labelled graph.

Stolper-Samuelson theorem In the Heckscher-Ohlin model, suppose a relatively capital-abundant country opens to trade. Who gains?...

Stolper-Samuelson theorem In the Heckscher-Ohlin model, suppose a relatively capital-abundant country opens to trade. Who gains? Check all that apply. Multiple answers:You can select more than one option A: Workers B: Owners of capital C: The country as a whole

Subjects