Theory of Trade
Theory of Trade
Theory of Trade
Unrealistic assumptions:
• A world with only two countries and two goods.
• No transportation costs between countries.
• No differences in the prices of resources in different
countries.
• Said nothing about exchange rate, assuming that
wheat and rice can be swapped on a 1-to-1 basis.
• Resources can move freely from the production of
one good to another within a country.
• Constant returns to scale. In reality, both diminishing
and increasing returns to specialization exist.
COMPARATIVE ADVANTAGE