Trade between dissimilar countries: insights from the factor proportions theory

In the preceding chapter we saw that if relative prices differ in two isolated countries, the introduction of trade between them will be mutually beneficial. Different relative prices of commodities reflect the fact that relative opportunity costs differ in the two countries. In the simple two-good model, each country has a comparative advantage in one commodity and a comparative disadvantage in the other. Given the opportunity to trade, each country will increase production of the commodity in which it has a comparative advantage, exporting it in exchange for the commodity in which it has a comparative disadvantage.