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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.

    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 Preview


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

    Solution Summary

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