Question

Under what circumstances would there be a “no-arbitrage” situation in goods markets between two nations?
Answer：when the relative price of the currencies is equal to one

Which formula we use to state it?

Answer 1

Ans.

- Trade also leads to greater efficiency by fostering specialization based on comparative advantage.

- Traditional trade models, such as the Ricardian model and the Heckscher–Ohlin model, focus on specialization and trade according to comparative advantage arising from differences in technology and factor endowments, respectively

- A country has an absolute advantage in producing a good (or service) if it is able to produce that good at a lower cost or use fewer resources in its production than its trading partner.

- A country has a comparative advantage in producing a good if its opportunity cost of producing that good is less than that of its trading partner

- Each country by specializing in the good in which it has a comparative advantage, each country increases its welfare

- A country’s comparative advantage can change over time as a result of structural shifts in its domestic economy, shifts in the global economy, the accumulation of physical or human capital, new technology, the discovery of such natural resources as oil, and so on.

- When there is no comparative or absolute advantage there is no arbitrage and international trade is not favourable.

- Formula to assess is :