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True or False Economics Related Question

Econ
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2/6/2015 7:30:56 PM
Posted: 2 years ago
Examine if the following statement is true or false, justifying your claim: In a two-country-two-good-one-factor (2x2x1) Ricardian model of international trade, each country
produces only one good in equilibrium.
Diqiucun_Cunmin
Posts: 2,753
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2/7/2015 9:30:21 AM
Posted: 2 years ago
At 2/6/2015 7:30:56 PM, Econ wrote:
Examine if the following statement is true or false, justifying your claim: In a two-country-two-good-one-factor (2x2x1) Ricardian model of international trade, each country
produces only one good in equilibrium.

Assuming constant MC, it is sometimes true and sometimes false. It's true if the two countries have different opportunity costs. Then by the law of comparative advantage, if each country specialises in producing the good in which it has comparative advantage, the total output of all economies will increase, so each country will produce only one good. However, it's also possible that the two countries have the same opportunity cost. In that case they'll just keep producing in the autarky position since trade would be pointless.

Assuming variable MC, it is false. the total output is maximised if the TOT is tangent to the PPFs of both countries. The production point is the point where the two curves touch. The two countries will only engage in partial specialisation.
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