Consider a situation in which two countries that can produce a good are subject to forward-falling supply curves (Average Cost curves). In this case, however, suppose that the two countries have the same costs so that their supply curves are identical. 

a)What would you expect to be the pattern of international specialization and trade? What would determine who produces the good? (10) 

b)What are the benefits of international trade in this case? Do they accrue only to the country that gets the industry? (10) 

c)If one of the countries, which does not have the industry, has potentially a cost advantage due to cheap labor, what would then be the benefits of trade for the world and that country? (10)

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Given Both the countries have forward falling supply curves ie cost becomes cheaper as they produce ... View the full answer