Question

5. Why similar countries trade

Consider two hypothetical countries called Cassvania and Koopmansville. The countries have similar production technology, and yet they specialize and trade with each other.

Read the following details and determine why international trade is possible between these two countries.

Both nations have abundant farmland and could either grow grains or raise livestock. If farmers in the same area produce a lot of the same type of product, they are able to do so at a cheaper cost per unit. Because many of Koopmansville’s residents are vegetarians, its farmers have focused on growing grains and exporting the surplus to Cassvania. Similarly, the Cassvanian farmers have focused on livestock given their preferences as carnivores.

Despite their differences, Cassvania and Koopmansville are able to trade because of (internal or external) economies of scale.

Answer 1

This is explained under the theory of comparative advantage. When countries can produce both of the goods, country will produce one in which it has a comparative advantge that means oppurtunity cost of production of that good is less in this country and the other country will produce the good in which its has less comparative disadvantage. Here both countries can produce both of the goods but koopmansville has comparative advantage in producing grains hence they're producing grains. And cassvania has got comparative advantage over live stock that means it can be produced at less oppurtunity cost in this country as compared with koopmansville.