Question

What effect do rising costs (rather than constant costs) have on the extent of specialization and trade? Explain.

Answer 1

Answer:-

It is the difference in domestic cost ratio that generally gives rise to comparative advantage and thus promotes trade between nations.

Rising costs or increasing costs, in general, reduces the difference in domestic cost ratios between nations and thus leads to a disappearance of underlying comparative advantage

As comparative advantage disappears, any further treading towards specialization turns out to be uneconomical.

Disappearance or reduction of comparative advantage adversely impacts the trade between nations as well.

Thus, rising cost adversely impacts the trade and leads to less-than-complete specialization.