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Suppose that a country produces both wheat and TV's under autarky. The relative price of a...

Suppose that a country produces both wheat and TV's under autarky. The relative price of a TV is 40 bushels of wheat. If this country now engages with trade with another country which has a comparative advantage in producing TVs, can the post-trade price of TV be greater than 40 bushels of wheat? Explain.

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Answer #1

The relative price of a TV in the country is 40 bushels of wheat. If the other country has a comparative advantage in the production of TVs, that country must be able to produce a TV at a lower cost than 40 bushels of wheat. Therefore, the other country would be ready to sell a TV to the first country at a price which is lower than 40 bushels of wheat. Moreover, the first country will not buy a TV at more than 40 bushels of wheat as it can produce the TV on its own at this price. So the post-trade price of a TV cannot be greater than 40 bushels of wheat.

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