Brief notes on Gains from Trade under Constant Cost Conditions

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Under constant cost conditions, international trade, according to the comparative cost advantage, leads to complete specialisation. In other words, each country specialises in the production of the single good in which it has comparative advantage.

Combined output of all the goods increases after trade. The gains from international trade are divided among the trading countries according to the international exchange ratio.

The domestic cloth-wheat ex­change ratios are represented by line EK in England and line IE’ in India. In the absence of trade, suppose India produces and consumes at point T (i.e., OA of wheat and OB of cloth) and England produces and consumes at point R (i.e., OC of wheat and OD of cloth).

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Now, using O’ as the origin, turn the England curve EK upside down as E’K’, but leaving it otherwise unchanged. On E’K’ line, England’s production and consumption in isolation is at R’ (i.e., O’C wheat and O’D’ cloth).

Thus, in the absence of trade, total combined production of wheat is OA (India) plus O’C’ or E’H (England), while total combined production of cloth is OB or E’F (India) plus O ‘D’ (England).

After international trade, India specialises completely in wheat and produces OE quantity of wheat. On the other hand, England specialises completely in cloth and produces a quantity of O’E’.

Thus, as a result of specialisation and international trade the combined production of wheat of both the countries is larger by the amount AH and the combined production of cloth of both the countries is larger by the amount D’F. The production gains from trade under constant cost conditions are summarised below:

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Without trade.

Total wheat production = OA (India) + O’C’ or E’H (England)

Total cloth production = OB or E’F (India) + O’D’ (England)

With Trade.

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Total wheat production = OE’ (India only)

Total cloth production = O’E’ (England only)

Gains from Trade

Increase in total wheat production = AH

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Increase in total cloth production = D’F

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