Answer to Question #292807 in Economics for Hafsa

Question

Draw a figure showing the equilibrium point with trade for two nations that face constant opportunity costs. 

Answer 1

In this case it is supposed that both countries A and B are producing at the constant costs so that their opportunity cost curves are negatively sloping straight lines. This is the classical Smith-Ricardo type case.

If trade takes place, country A specialises in the production of Y as it has comparative cost advantage in the production of Y. Country B specialises in the production of X, as it possesses comparative cost advantage in the case of this commodity. Their respective comparative cost advantages or specialisations are evident from the differences in the slopes of their opportunity cost curves.