2 management - School of International Business and ...

153 The Puzzle of Globalization
The direction of specialization of a country is indetermined without including another coun-
try (graph 2). Any direction of specialization from P(A) = C(A) down to P(F 1) or up to P(F
2) may offer an equal satisfaction level for the consumers (I(F)); solely the consumption
structure differs: In C(F 1) consumers prefer x2 which has to be imported, whereas in C(F
2) consumers prefer x1 which is then the import good.
Graph 3 shows the relevance of the scope of specialization. If trade allows a high degree
of specialization, the consumers achieve a higher level of consumption: The production
in P(F 1) allows the consumption in C(F 1) at the indifference curve I(F 1), whereas the
higher specialization in P(F 2) offers the consumers larger quantities of both goods (C(F
2)) at the higher indifference curve I(F 2). This higher consumption level needs a larger
trade volume of the good preferred by the consumers (x2).
Graph 4 divides the welfare effect into gains from trade and gains from specialization.
Suppose that the country has a comparative advantage in x1 but is not able to specialize
in the short run on this production. The original price p(A) must increase to p(F 1); this
leads to decreasing demand on market x1 and increasing demand on market x2. Resulting
from change in relative goods prices, the export of x1 and import of x2 allows a higher
consumption level C(F 1) at the indifference curve I(F 1). The move from CI(A) to C(F 1)
indicates the gains from trade. Assuming that in the long run the country is able to make
full use of its comparative advantage, the production will move down to P(F 2) which leads
to the higher consumption level (C(F 2)). The move from C(F 1) to C(F 2) indicates the
gains from specialization.