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Pattern of Trade and Gains From Trade

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1. Consider 2 countries that each produce two goods X and Y defined as follows.

HOME FOREIGN
X= αLx α=10 X= αLx α=5
Y=βLy β=10 Y=βLy β=10
LH=10 LF=10

Suppose that the home country experiences technological growth in the X sector such that α increases to 12. Describe the impact on the free trade price, the pattern of trade and gains from trade.

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Solution Summary

Looking at hypothetical countries, we examine the pattern of trade and gains from trade according to Ricardo's theory of comparative advantage.

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Hi,

Theoretically, there would be little change, because the home country already has a comparative advantage in X. Trade ...

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