Gains from Trade
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An examination of the Ricardian model of comparative advantage yields the clear result that trade is (potentially) beneficial for each of the two trading partners since it allows for an expanded consumption choice for each. However, for the world as a whole the expansion of production of one product must involve a decrease in the availability of the other, so that it is not clear that trade is better for the world as a whole as compared to an initial situation of non-trade (but efficient production in each country). Are there in fact gains from trade for the world as a whole? Explain.
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The solution explains if there are gains from trade to the world as a whole.
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The gains from trade are shown to be realized when the country engages in specialization and trade. Complete specialization is assumed such that the country stops producing the good in which it has a comparative disadvantage. The country trades good in which it has a comparative advantage, for the ...
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