Production of a good is characterized by external scale economies. Currently there is no trade in...
Production of a good is characterized by external scale economies. Currently there is no trade in the product, and the product is produced in two countries. If trade is opened in this product, all production will be driven to occur in only one country.
a. With free trade, why would production occur only in one country?
b. Does opening trade bring gains to both countries?
Explain.
Homework Answers
Ans
1 Because it is beneficial to produce output in one country as it reduces cost due to economies of scale.
2 Yes if both focus on comparative advantage because by doing total output rises
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