Reference no: EM131001898
In the two countries, Techi and Aggi, the costs of all factors of production are constant, the factors are perfect substitutes for each other and thus equally productive (efficient). To demonstrate the potential gains from trade between the two countries, assume for simplicity that only two goods are produced; Food and Computers. In Techi, if all productive resources are devoted to producing food-stuff, 80 units may be produced. Alternatively, if all of Techi’s productive resources are devoted to manufacturing computers, the output is 40 units. Corresponding output-data for Aggi are 40 units of food and 10 units of computers.
Currently, before trade, Techi’s residents prefer to produce and consume 30 computers and 20 food-units. The corresponding production and consumption data for Aggi is 5 computers and 20 food-units. The exchange rate between the two countries is 1:1 and is not assumed to change when trade between the two countries opens up.
Following specialization based on comparative advantage and thus Ricardian mutually beneficial trade, assume that one computer trades for 3 units of food. Also, that Techi maintains her autarky consumption of 30 computers while Aggi consumes 10 food-units when trade opens up between the two countries.
What is the net gain from trade measured in food-units?
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