Suppose that the world consists of 10 countries. The countri
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Suppose that the world consists of 10 countries. The countries are identical in terms of their levels of technology and
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Suppose that the world consists of 10 countries. The countries are identical in terms of their levels of technology and efficiency, their quantities of factors of production, the preferences of their consumers, and so on. There are two industries in the world: pizzerias and automobile factories. Correspondingly, there are only two consumption goods: pizzas and cars. The big difference between pizzerias and auto factories is in their scale: Auto factories have to be large, whereas pizzerias can be small. The world starts off in autarky. In each country, the market is big enough to support only one auto factory, although there are many pizzerias. Now suppose that the world opens to trade. Both pizzas and autos can be traded (we ignore the fact that in real life problems of congealing cheese prevent trade in pizzas). Trade does not affect the production technology in any country.What do you expect to happen to the relative prices of pizza and cars (i.e., the number of pizzas required to buy one car) as a result of the opening of trade? Will there be reallocation of factors of production into one or the other sector? How and why will the opening of trade affect efficiency?
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