Question

Explain the statement: “International trade reduces the benefit from ‘scarcity’.”

Answer 1

An international trade leads each nation to expand the production of the goods in which the country has the comparative advantage and reduce the production of the goods where it does not have the comparative advantage. At existing prices of the goods there will be an excess demand for the nation's abundant factor and resulting to an excess supply of its scarce factor. It will lead to a change in relative prices in both nations moving each toward the others. As the factors are equally productive across nations thus in the end prices will be equalized. Thus the scarce factors must oppose international trade because it reduces their payments, and the abundant factors should favour international trade. Hence we can conclude that the international trade reduces the gains from ‘scarcity’

answered by: anonymous