In the two-country two-good model, both countries can gain from trade as long as their relative advantages and disadvantages in producing different goods are different.

Question

Quizplus · Accepted Answer

If the relative advantages and disadvantages in producing different goods are the same in both countries, then there would be no incentive for trade as both countries would produce the same goods at the same cost. However, if the countries have different relative advantages and disadvantages, then they can specialize in the production of the goods that they are relatively better at producing and trade with each other. This allows both countries to consume more of both goods than if they were producing everything themselves.

In the Two-Country Two-Good Model, Both Countries Can Gain from Trade