Specialization in international trade- based on Ricardo’s Theory: Given that two nations have equal resources and both nations agree to specialize in the production of a product that is most efficient, determine:
a) Specialization between the two nations (which nation specializes in which product?)
b) The range of terms of trade (trade negotiation terms)
c) The best of terms of trade (democratic distribution of trade benefit)
d) The net benefit for each country (after specialization)
e) Discuss the limitations of production and export based on such assumption in the current global economy
Use the following data to answer the above questions.
Before specialization
Products/Country Japan US
Auto 10 20
Plane 5 20

A) Japan specializes in Auto while US specializes in Planes

B) The range of terms of trade:

P = A . if P =A = 2A then the specialization will be beneficial to both countries.

C) The best terms of trade will be

P = ( A + 2A )/ 2 = 3A  / 2 = 1.5A

D) The net benefit for each country (after specialization)

Japan : 20A-(7.5A+10A) = 2.5A

U.S :  40P- (13.33P + 20P) = 6.67P

E) some of The limitations of production and export  :

i) There are more than two countries in the world hence the assumption are not real

ii) In the table the quality of goods produced is not tabulated/considered as well

iii) The technological expertise of both countries where not considered as well

Explanation:

A) From the information provided below ; Japan specializes in Auto while US specializes in Planes , this is because Japan is more efficient in the production of Autos when compared with Plane production.

B) The range of terms of trade:

lets assume that trade in Japan before specialization was : 12 A = 6 P, hence P = 2A  also assume that of US  to be ; P = A . if P =A = 2A then the specialization will be beneficial to both countries.

C) The best terms of trade will be

P = ( A + 2A )/ 2 = 3A  / 2 = 1.5A

D) The net benefit for each country (after specialization)

Japan : 20A-(7.5A+10A) = 2.5A

U.S :  40P- (13.33P + 20P) = 6.67P

E) some of The limitations of production and export  :

i) There are more than two countries in the world hence the assumption are not real

ii) In the table the quality of goods produced is not tabulated/considered as well

iii) The technological expertise of both countries where not considered as well

answer; capital structure decision;