In a two by two model of international trade, it is assumed …

Question

In a two by two model of international trade, it is assumed that

Answer 1

In a two by two model of international trade, it is assumed that

both countries could gain from trade at the same time, but the volume of the gains depends on terms of trade ✓
both countries could gain from trade at the same time, and the volume of the gains does not depend on terms of trade
both countries could gain from trade at the same time, but term of trade is inconsequential for the distribution of the gains
neither country could ever gain from trade since term of trade is depends on the distribution of the gains from trade

Explanation

In the two-country, two-good model, trade can benefit both countries at once. How big each share of the gain is depends on the terms of trade, meaning the price at which goods swap.

A price nearer one country’s own cost gives most of the gain to the other.

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