Consider the two economies shown in Figure 3.1. When there is free trade, are we sure that

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QUESTION:

Consider the two economies shown in Figure 3.1. When there is free trade, are we sure that each country should specialize completely in producing only one of the products? For instance, perhaps each country should shift along its production-possibility curve only about halfway from the no-trade production point S0 to the intercept point S1. If the countries still traded with each other at the relative price of 1 W/C, would producing at the halfway point be better or worse for each country (compared to completely specializing at point S1)?

Figure 3.1: The Gains from Trade, Shown for Ricardo’s Constant-Cost Case


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