Question: Differences in relative prices of commodities reflect nations comparative advantages. A nation will have a comparative advantage in producing the commodity that has the lower
Differences in relative prices of commodities reflect nations comparative advantages. A nation will have a comparative advantage in producing the commodity that has the lower relative commodity price. As countries specialise in their commodity of comparative advantage, they experience increasing opportunity costs. Assume the following: (i) There are two countries, South Africa and Zambia (ii) There are two commodities, Gold and Copper (iii) In autarky, the equilibrium relative price of gold is Pb = 1/8 in South Africa and Pb = 8 in Zambia. Use the information provided above and well-drawn diagrams to explain the gains from trade for both South Africa and Zambia.
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