Suppose 1 country was more efficient at producing both products. Discuss whether it is the case that specialisation and trade will always benefit both countries.

From the table, it can be seen, with the same number of labourers (50 of them), country A is more efficient in producing both guns and roses now. However the opportunity cost of producing a gun in country A is 2 roses whereas the opportunity cost of producing a gun in country B is 3 roses. This means that A has a comparative advantage in producing guns. Thus A should specialise in producing guns and B in roses and trade can still be beneficial. This can be elaborated with an example. Imagine after specialisation, A will produce 200 guns and B will produce 300 roses. Now A decides to trade at an exchange rate of 1 gun for 2.5 roses and decides to trade 100 guns and gain 250 roses. The 2 countries outputs after trade are shown on the table.

        From the 2 graphs, it can be seen that the points after trade are above the PPC curves of the 2 countries without specialisation and trade. Therefore this shows that with comparative advantages, 2 countries can still gain from specialisation and trade.

        However there are cases that when a country is efficient in producing 2 goods, there are no benefits gained from trade and specialisation. Firstly, if there are no differing opportunity costs, then the country is better off producing the goods by itself as there are no comparative and absolute advantages to enjoy at all.

Secondly, even with comparative advantages and specialisation, the exchange rate of the 2 goods must lie between the 2 countries’ opportunity costs. In this particular case, for trade to be beneficial for both countries, the exchange rate should be 2 roses < 1 gun < 3 roses.

Lastly, the theory of comparative advantage assumes constant opportunity costs within an economy (straight line PPC curves). However, in real life, it is usually not so as opportunity costs are increasing (convex PPC). Therefore with increasing opportunity costs in a country, specialisation may not benefit after all as we are sacrificing efficiency, substituting less efficient factors of production for more efficient ones.