Many countries, like the developed economies in the OECD, heavily subsidize agricultural products. This is a problem for many small developing countries, who have trouble competing because of such subsidies.

Consider this theoretical scenario. Suppose there is a developed country, call it A, and a developing country, call it B. Suppose there are two goods, an agricultural commodity, cantaloupes, and a high-tech good ,TV sets. Both countries produce both goods, let's say, and are in equilibrium. What inputs would be used to produce each good? And which country do you think would export which good?

Now assume country A subsidizes cantaloupes. What will this two-country trade model predict about the outcome of this subsidy? How will production shift? Which resources would be favored in each country? Who wins and who loses? Is there any mechanism by which everyone can be made better off? If so, how plausible do you think it is?

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In this theoretical scenario lets assume that both countries have comparative advantages in producin... View the full answer