Question

International trade does not allow international division of labour

Answer 1

The international division of labour theory is essentially based upon two elements: the “Theorem of Comparative Cost Advantages”, which originates from Ricardo, and the “Factor Proportion Theo- rem” founded by Heckscher and Ohlin. The reason why international trade takes place and profits result for all participants in the process, can be deduced from the theorem of comparative cost advantages. The factor proportion theorem, which is considerably younger than the theorem of comparative cost advantages, attributes comparative cost advantages to differences between countries in” the way they are endowed with factors of production.


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Answer 2

Answer:

In our model, the division of labour is limited by both the extent of the market, and by coordination costs. International trade eliminates the duplication of coordination costs across countries, which encourages greater division of labour, and hence higher levels of output and welfare.