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Hi

"Assume that two countries can potentially trade goods in an industry that is characterized by external economies of scale. Country B produces at Q(B) in autarky and country A produces at Q(A) in autarky. What will the allocation of production look like if the two countries start to trade?"

My intuition would be that country A would produce a greater output since they have a lower AC than country B at the autarky outputs, but will this continue so that country A actually produces everything?

Thanks!

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  • $\begingroup$ Is there only one good in the economy? It seems so, but that is unusual for these exampes. Further, if that is the case, then how can the two countries trade? If it is not the case, then the question is rather which country will produce which good. In that case, what will most likely happen is that each country specializes in producing one of the goods, in which it has teh comparative advantage. $\endgroup$ – BB King Oct 25 '16 at 16:39
  • $\begingroup$ I don't think that it is a one good economy, rather that this only shows the demand and the average costs for one of the goods. I guess the answer they are looking for is that only one of the countries produces all of the output of the world economy, but then the problem is which country is that. $\endgroup$ – user5744148 Oct 25 '16 at 19:36

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