Answer to Question #284033 in Economics for Hafsa

Question

Why is there incomplete specialization in pro- duction (even in a smaller nation) with increasing opportunity costs? How are the results under increasing costs different from the fixed-costs case? 

Answer 1

The reason for incomplete specialization under increasing costs is that as each nation specializes in the production of the commodity of its comparative advantage, the relative commodity price in each nation moves toward each other (i.e., become less unequal) until they are identical in both nations. At that point, it does not pay for either nation to continue to expand the production of the commodity of its initial comparative advantage. This occurs before either nation has completely specialized in production.

Under constant costs, each nation specializes completely in production of the commodity of its comparative advantage (i.e., produces only that commodity).The reason is that since it pays for the nation to obtain some of the commodity of its comparative disadvantage from the other nation, then it pays for the nation to get all of the commodity of its comparative disadvantage from the other nation (i.e., to specialize completely in the production of the commodity of its comparative advantage).