This is an example taken from Krugman's book:

Consider the case where the international relative price (of cloth in terms of wine) is

$\frac{p_{c}}{p_{w}} = \frac{a_{lc}}{a_{lw}}$. Where $a_{lc}$ and $a_{lw}$ are the unit labor requirements for the production of cloth and wine respectively (think of these as being the inverse of productivity in each sector). These prices are below $\frac{a_{lc}^*}{a_{lw}^*}$. The Home country has a lower opportunity cost in the production of cloth.

So given these prices, i.e., $\frac{p_{c}}{p_{w}} = \frac{a_{lc}}{a_{lw}}$ and $\frac{p_{c}}{p_{w}} < \frac{a_{lc}^*}{a_{lw}^*}$, I understand that Home will produce both goods (i.e., not specialise) while Foreign finds better to specialise in wine (since the relative price of wine is higher than the opportunity cost). But how does Foreign obtain cloth? Since Home is not exporting any cloth and there are only two countries, how can one of them be an autarky while the other specialises in one of the goods?

  • $\begingroup$ Why do you think Home is an autarky here? $\endgroup$ – Giskard Apr 28 '18 at 11:48
  • $\begingroup$ Since the relative prices are equal to the relative unit labor requirements for Home, doesn't that mean Home will not specialise? And if Home produces both goods, isn't it an autarky? $\endgroup$ – BenBernke Apr 28 '18 at 12:10
  • $\begingroup$ Home may not specialise, but that does not mean it is an autarky. $\endgroup$ – Giskard Apr 28 '18 at 12:50
  • $\begingroup$ Oh, so even though Home produces both goods, we assume that it exports some of the cloth to Foreign? $\endgroup$ – BenBernke Apr 28 '18 at 13:13