Explain how comparative advantage leads to trade with perfect specialization, given a linear production possibility frontier.

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Expert Solution

If the price of commdity X is and price of commodity Y is , and and are the labor coefficient of each output, it can be shown that in the Ricardian framework when , the country A will make maximum gain by completely specializing X. This can be shown considering the following problem. The problem is,

Subject to,

where,

Here,

is the international price ratio. The constraints represent the production possibility area of country A. The diagram is as follows.

Therefore, the comparative advantage leads to trade with perfect specialization, given a linear production possibility frontier.

Rahul Sunny answered 1 year ago

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