International Economics 8th Edition by Dennis Appleyard, Alfred Field

Exercise 2

Assume that a country produces and consumes two goods, cloth and machines, and is in equilibrium in autarky. It now finds that it can trade at international prices where ( P cloth / P machines ) on the world market is greater than ( P cloth / P machines ) in the domestic market. Should it trade? If so, what commodity should it export? Why? Will it gain from trade? How do you know?