Question

Suppose two nations are identical in every respect, they produce commodity X and Y. Now nation1 expands its production of commodity X and achieves economies of scale, then if it is possible for the two nations to trade with each other? What’s the basis for trade? What’s the pattern of production and trade? What are the gains from trade?

Answer 1

Answer -
1. According to given information when two nations are identical in every respect of production of commodity X and Y ,if nation 1 expands its production of commodity X and achieve economies of scale means achieve maximum production in minimum cost then it is possible for these two nations trade with each other.
2.On the basis of comparative advantage, these nations trade with each other. As one nation expands production of commodity X with minimum cost it produce large units of it.Its opportunity cost for the production of X commodity is lower than its trading nation.Then this nation will become expert in the production of commodity X and trade it for other goods to other nation.
3.As nation 1 has comparitive advantage in production of X it focuses only on commodity X and export it to another nation in exchange for commodity Y.
4.Both nations will gainning from it as nation 1 produce excess of commodity X due to its low opportunity cost it can achieve cost efficiency in X and export it to other nation ,in same way as another nation can produce both X and Y but it gets commodity X from 1st nation at low cost it can utilise its resources for commodity Y so it can produce excess commodity of Y and export it to nation 1.