(In your answers, you will need to picture additional community indifference curves that exist but are not shown explicitly in Figure 4.3.) Note that capital owners are shown to gain regardless of whether their capital is used in the expanding … Starting at the no-trade point A in Figure 3-3, show what would happen to production and consumption. Value of a commodity is determined by the amount of labour embodied in it. Starting at the no-trade point A in Figure 3-3, show what would happen to production and consumption. At this new exchange rate, A will specialise in the production of Y. DOI link for - The Welfare Gains from Trade - The Welfare Gains from Trade book. The gains from international trade arise because of the diversity in the conditions of production (natural or acquired) in different countries. This means that no country export to another country. 5.2 suggest that trade is a one-way traffic. Key concepts include how to determine comparative advantage, the terms of trade, and how comparative advantage leads to … Likewise, country B gains from trade. Learning Objectives. This switch to lower cost producers will lead to an increase in consumer surplus and economic welfare. Before publishing your Articles on this site, please read the following pages: 1. Now let us assume that trade opens up. What is true is that country B pays A for its export good X in coun­try C, country C pays B via country A and so on. b. Export is defined as the act of shipping goods and services out of the port of a … Starting at the autarky point A in Figure 3-3, show what would happen to pro-duction and consumption. Demonstrate how the monopoly reduces gains from trade. Country 1 will export coal to country 2. And so based on our very simple model here there are no gains from trade. Consumer surplus with trade is $3,200. Inside the Ocean Spray Cranberry Cooperative, Intra-Regional Trade: A Challenge for South Asia, Competitiveness - India as a smartphone powerhouse, Harley-Davidson may shift production outside of the US to avoid EU tariffs, Lifting productivity growth via immigration. absolute advantage. First, procompetitive gains from trade and gains from variety expansion simultaneously arise, which seems quite self-evident. Each point lies on the interior section of the country's production possibility frontier. The movement from R 1 to R 2 in country B reflects the gain from specialisation and exchange to the small country B from the international trade. Clearly, both coun­tries will gain. At an inter­national exchange rate of 1: 3 (lying between two domestic exchange rates of 1 : 4 and 1 : 2), country A will now export 3 units of Y and import 9 units of X. Fifthly, another restrictive assumption of the classical trade doctrine is that it used two countries, two commodities and one input. Question: 2 Understanding The Specific Factors Model In The Gains From Trade Diagram In Figure 3-3 (slide 19) In Class, Suppose That Instead Of Having A Rise In The Relative Price Of Manufacturing, There Is Instead A Fall In That Relative Price. Starting at the autarky point A in Figure 3-3, show what would happen to production and consumption. We call that gains from trade. In the gains from trade diagram in Figure 3-3, suppose that instead of having a rise in the relative price of manufactures, there is instead a fall in that relative price Starting at the no-trade point A in Figure 3-3, show what would happen to production and consumption. Comparison,,, Maximum Consumption without trade: 25 25 Consumption after trade: 50 100 25 37 Gains from Trade: 25 Fish 50 113 12. ch . 1 Answer to In the gains from trade diagram in Figure 3-3, suppose that instead of having a rise in the relative price of manufactures, there is instead a fall in that relative price. Since country A is a capital-intensive coun­try, Y-production here becomes more capital- intensive. A measure of total gains from trade is the sum of consumer surplus and producer profits or, more roughly, the increased output from specialization in production with resulting trade. In our example, we have seen that coun­try A specialises in the production of Y as it has comparative advantage in Y-production. And let's make this one right over here, this horizontal one let's make this the apples axis and let's make the vertical one … Q? b. Will Brexit hurt the Kenyan flower trade? a. Before trade, let us assume that country A transfers all labour from the production of X to the production of Y in which its pre-trade opportunity cost (1:2) is lower and country B shifts all labour from the production of Y to the production of X in which its pre-trade opportunity cost (1: 4) is lower. In this revision video we work through an example of how specialisation and trade can lead to welfare gains using supply and demand analysis. We have learnt that internal terms of trade is 1: 2 in country A and 1: 4 in B. Key Takeaways Key Points. (Figure: Gains from Trade) Refer to the figure. Since capital is the country's relatively abundant factor vis-à-vis the rest of the world and labor is its relatively scarce factor, the general conclusion is that a country's abundant factor gains from trade liberalization while a country's scarce factor loses. 1. Interactive: Mapping the Flow of International Trade. For example, nonrenewable resources can slowly run out, increasing the costs of production, and reducing the gains from trade. a. Each country tries to specialize in the production of those commodities in which its comparative cost advantage is greatest or the comparative disadvantage is the least. 1:59 Basic Concept Of Absolute Advantage Country A has the tendency to spe­cialise in commodities on the right hand side of Fig. As soon as country A transfers labour from X-production to Y-production and country B from Y-production to X-pro­duction, there occurs complete specialisation. Expain why the overall gains from trade are still positive . WEEK 2: Model Building and Gains from Trade - Coggle Diagram. This gap was filled by the classical author J. S. Mill by introducing the concept of ‘reciprocal demand’ in trade theory. Gains From International Trade: The gains from international trade arise because of the diversity in the conditions of production (natural or acquired) in different countries. The gain from trade arises because of specialisation in production and division of labour. In economics, the invisible hand of the market is a metaphor conceived by Adam Smith to describe the self-regulating behavior of the marketplace. A doctrine propounded at least 180 years ago is even now respected by all, possibly because of its originality. As a result of trade, country B consumes ad­ditional 1/3 units of Y. 2. 3. Positive Analysis. Normative Statement Analysis . compensation principal: (the nation benefits if the gainers would be better off even after fully compensating the losers for their losses) ... the gains from exchange and specialization. A country has an abso­lute advantage over another country in the production of a good if it can produce it at a lower cost. Explain The This is known as ‘gains from trade’. Suppose that an English worker can produce 50 scones per hour or 1 sweater per hour. While country B has an absolute advantage in the production of X. For this purpose, a diagram similar to Fig. DOI link for - The Welfare Gains from Trade - The Welfare Gains from Trade book - The Welfare Gains from Trade . a. As country A in our case is a capital-rich country, it specialises in the pro­duction of Y (comparative costs of Y are cheaper). Flashcards. a. This is called ‘gains from trade’. Spell. 2 A) & … produce a good using fewer inputs than … Homework Help. He has over twenty years experience as … MODERN APPROACH Modern Theory divides the gains from trade into gains from production and gains from consumption. WEEK 2: Model Building and Gains from Trade . Starting at the no-trade point A in Figure 3-3, show what would happen to production and consumption. But which products should a country specialise in? Country B now trades with A at an exchange rate of 1: 3 by exchanging 1 unit of X for 4/3 = 1 1/3 units of Y. As a result, production of X will decline in country A by 6 units while produc­tion of Y will increase by 3 units. Which good is exported and which is imported? Share Your PPT File, Calculation of Term of Trade (With Formula). Starting At The No-trade Point A In Figure 3-3, Show What Would Happen To Production And Consumption. 2. the basis for and the gain from trade with increasing costs . And the answer to the question is YES. On the other hand, let us assume that country B is a labour-rich coun­try. The interactive visualization you see in this post was created by data visualization expert Max Galka from the Metrocosm blog. Producer surplus is the area above the supply curve and below the horizontal price line. Learn more ›. STUDY. Same is true for the countries. Christmas 2020 last order dates and office arrangements Despite having a long history of coffee production it is only in the last 30 years that it has become a global player. School University of California, Davis; Course Title ECN 160a; Type. 2.6 The Basis for and the Gains from Trade under Constant Costs 42 2.6A Illustration of the Gains from Trade 42 2.6B Relative Commodity Prices with Trade 43 2.7 Empirical Tests of the Ricardian Model 44 CASE STUDY 2-4 Other Empirical Tests of the Ricardian Model 46 Summary 47 Key Terms 48 Questions for Review 48 Problems 49 In this treatise, Ricardo argued that specialization … But for simplicity, Ricardo’s model is 2 x 2 x 1 model. Learn. Learn. If now trade opens up, B will export larger U-good and A larger Z-good. In analysing his trade doc­trine, Ricardo started with the unreal world. Diagram of trade creation In the gains from trade diagram in Figure 3-3, suppose that instead of having a rise in the relative price of manufactures, there is a fall in that relative price. We can use science to establish wether its true or false. That is why, each country is interested in ex­changing its own specialised products for non- specialised products. Now trade is opened and the country can trade whatever it wants at an international price ratio of 1 W / C . Removing tariffs reduces the price of imports from P1 to P2. Essentially, it merges the indifierence map between the parties in the trade by inverting one of the agents diagram. They do have different opportunity costs and then you might have no gains from trade. Only the gaps in the Ricardian model have been filled up by modern writers. Trade is an essential part of economic prosperity, but how much do you know about global … the comparison among producers of … Important criticisms against this theory are: (i) Unrealistic Assumption of Labour Theory of Value: Firstly, one of the fundamental as­sumptions of the classical trade theory is the labour theory of value. Thus, production cost is measured in terms of labour costs only. 1. It is true that transport costs are important in determining the exchange rate. a. Basically an opinion. For mutually beneficial trade to take place, the two nations have to agree an acceptable rate of exchange of one product for another.There are gains from trade between the two countries. Every day you rely on many people from around the world, most of whom you do not know, to provide you with the goods and services that you … In this diagram we depict the autarky production and consumption points for the US and France. Which good is exported and which is imported? Match. 2 is adopted. a. Instead, he con­cluded that trade would benefit both nations if comparative costs differ. Let the international terms of trade be 1:3. b. Now, by exporting Y, it will bring more X. In this diagram we depict the autarky production and consumption points for the US and France. Supporters of Ricardo’s doctrine have ad­equately demonstrated that transport costs do not affect comparative cost doctrine. We described the gains from trade in the market for bread in one city using Figure 8.9a, reproduced as Figure 1 below. Essentially, free trade enables lower prices for consumers, increased exports, benefits from economies of scale and a greater choice of goods. Maybe there's some way that they can't know each other's opportunity costs. He writes extensively and is a contributor and presenter on CPD conferences in the UK and overseas. Gravity. Figure 9-Refer to Figure 9-17. There's some way that they don't trade. This preview shows page 1 - 2 out of 2 pages. c. Explain why the overall gains from trade are still positive. Being a labour-rich country, country B’s production of X becomes more labour-intensive. Which good is exported and which is imported? Trade creation refers to the increase in economic welfare from joining a free trade area, such as a customs union. Modelling . Write. West Yorkshire, Use community indifference curves as your indicator of national welfare in order to evaluate the following claim: “An improvement in the terms of trade increases But, in economics terms, this can mean something a little more complex. c. The gains from trade amount to $800. seeing its global market share increase from just 1% in 1985 to 20% in 2014, … He has over twenty years experience as Head of Economics at leading schools. Geoff Riley FRSA has been teaching Economics for over thirty years. In the gains from trade diagram (Figure 3-3), … Ricardo’s doctrine states that a country will export that commodity in which it has a comparative advantage and import that product in which it has a compara­tive disadvantage. Before trade, country A consumed 6 units of X and after trade it con­sumes additional (9-6 = 3) units of X. Let A & B be endowed or born with an initial endowment of the two goods which we call the initial endowment, ›A = (!1 A;! Yi Chun L. Washington University in St Louis 02:57. Thirdly, Ricardo could not determine the ex­act terms of trade or exchange rate at which trade takes place. Edition 1st Edition. In terms of abstract economic logic, his demonstration matches that of the trade theorists. Similarly, country B has the ten­dency to specialise in commodities on the left hand side of the diagram. Why does gain from trade arise? If use of capital per unit of labour in country A is higher, then country A is a capital-abundant country. Let us assume that there are two countries, A and B, that produce two goods, X and Y, which require labour for their production. Some of the writers fit this theory in the real world without altering its fundamental con­clusions. In this revision video we work through an example of how specialisation and trade can lead to welfare gains using PPF analysis. In the absence of trade (i.e., under autarky or no trade) in country A, 3 units of X will ex­change for 2 units of Y and in country B 4 units of X will exchange for 1 unit of Y. How do you know that the chosen production points are on the country's PPFs? Maybe irrespective of what the models tell us about comparative advantage some country says, hey, I don't want to produce bananas. Specialization and the Gains from Trade. Gains from Trade. If Y is demanded more by country B, then country A would special­ise in its production and produce less in which it has a comparative disadvantage, say good V. Thus, comparative cost is again the basis of trade in the case of many commodities. If a country is unwilling or unable to increase exports when their price rises, then the price increase does it no good.” This is false, which … Since this country is able to import X-commodity at the lower international price, the terms of trade turn in favour of it. Get … According to Ricardo, a country will produce and export that commodity in which it has a comparative advantage and will import that commodity in which it has a comparative dis­advantage. Terms in this set (19) trade. Answer to this question was given by Eli F. Heckscher and B. Ohlin who suggested that differences in factor endowments and factor-intensity give rise to differences in com­parative costs. Starting at the no-trade point A in Figure 3-3, show what would happen to production and consumption. Gains from Trade. David Ricardo in 1817 first clearly stated and proved the principle of comparative advantage, termed a … Here we show how to calculate the surplus mathematically, and prove that the competitive equilibrium allocation maximizes the gains from trade. In the gains from trade diagram (Figure 3-3), suppose that instead of having a rise in the relative price of manufactures, there is a fall in that relative price.a. In contrast, (the poor) country B has a comparative advantage in the production of X. Pre-trade exchange ratios for A and B are 1 X for 2 Y (i.e., 6 for 3) and 1 X for 4 Y. As a result of international trade, point E would become reachable, defining the terms of trade line, which shows how great the gains from trade are. Suppose, there are four countries A, B, C, D who trade with two goods X and Y. Hypothesis or statement can empirical testable. if Px/Py > 1 the equilibrium price would fall to 1, the inverse for Px/Py < 1. incomplete specialization . Use community indifference curves as your indicator of national welfare in order to evaluate the following claim: “An improvement in the terms of trade increases welfare only if the country increases its quantity of exports in response. (Also check out his new project, Blueshift, which allows users to upload data and visualize it on maps with no coding required.) PLAY. Exports: The Economic Impacts of Selling Goods to Other Countries. In this lesson summary review and remind yourself of the key terms, graphs, and calculations used in analyzing comparative advantage and the gains from trade. 5.1. Likewise, country B has compara­tive advantage in the production of X. Should Canada accept the deal? Ricardo argued that trade gains could arise if countries first specialize in their comparative advantage good and then trade with the other country. These commodities have been arranged in a comparative advantage se­quence. . b. Similarly, country B will gain more by producing and exporting X from A by buy­ing more than 4 units of X. When barriers to trade are loosened and trading is increased, it will lead to a higher standard of living for the countries involved. This kind of specialisation results in more glo­bal output. For simplicity’s sake, let B, C and D be described as a single group of countries. Each country's gains from trade show up in the trade market diagram. In the gains from trade diagram Figure 3 3 suppose that instead of having a. Further, suppose that country A takes 1 day’s labour to produce 3 units of X and 2 units of Y. Coun­try B produces 4 units of X and 1 unit of Y by the same labour cost. Ricardo’s model concentrates on the supply (or cost) side and, hence, neglects the demand side. Suppose that a Scottish worker can produce 40 scones per hour or 2 sweaters per hour. Country A will now benefit if it can pro­duce and export good Y to buy more than 2 units of Y. Anyway, trade is mutually ben­eficial since it increases both production and consumption. It realizes gain by exporting those commodities which it has a relative advantage over other … Created by. Should the Super-Rich Pay for a Universal Basic Income? By Van den Berg, Hendrik, Joshua J Lewer. The implications of this theory were great as it meant a breakthrough in the economic science, especially, due to the contribution of the comparative advantage principle. According to classical writters, differences in cost form the basis of trade. The comparative cost doctrine is equally ap­plicable in a multi-country model. (iii) Multi-Countries, Multi-Commodities: Ricardo’s doctrine has also applicability in a multi-country, multi-commodity framework. b. comparative advantage. In the gains from trade diagram (Figure 3-3), suppose that instead of having a rise in the relative price of manufactures, there is a fall in that relative price.a. Question: 2 Understanding The Specific Factors Model In The Gains From Trade Diagram In Figure 3-3 (slide 19) In Class, Suppose That Instead Of Having A Rise In The Relative Price Of Manufacturing, There Is Instead A Fall In That Relative Price. 17.1 The Gains from Trade Learning Objectives. If trade is opened up, which of the following will occur? As trade benefits them, they trade with each other. diagram to demonstrate the gains from trade (albeit intertemporal rather than international). Test. The consumer definitely gains from trade for any number of firms in Home and Foreign, ... we combine them to discuss under what condition the national welfare improves by the movement from autarky to free trade. Critics argue that the doctrine has limited applicability since today’s trade is multilateral. Gains from trade. Test. In the gains from trade diagram in Figure 3-3, suppose that instead of having a rise in the relative price of manufactures, there is instead a fall in that relative price Starting at the no-trade point A in Figure 3-3, show what would happen to production and consumption. Can use scientific or empirical data to verify if something if true. But what about other goods? . Starting at the autarky point A in Figure 3-3, show what would happen to production and consumption. Normative analysis. Thus, Ricardo’s comparative cost doctrine demonstrates the basis of trade, direction of trade and gains from trade. To see this, let us look at Figure 5, which shows the autarky and trade … Gains from trade may also refer to net benefits to a country from lowering barriers to trade such as tariffs on imports. Home; Explore; Successfully reported this slideshow. increasing opportunity cost . (iv) Zero Transport Cost is Inconceivable: Fourthly, Ricardo neglects transport cost just for simplicity. Most less-developed countries have agriculture-based economies, and many are tropical, causing them to rely heavily upon the proceeds from export of one or two crops, such as coffee, cacao, or sugar. Uploaded By ctp21. Privacy Policy3. A gain from trade is a simple concept - two parties traded and both parties got something out of it. SlideShare Explore Search You. In the gains from trade diagram in Figure 3-3, suppose that instead of having a rise in the relative price of manufactures, there is a fall in that relative price. But, as labour is transferred to X-production, X-output rises by 4 units. The opportunities created by trade will induce a greater degree of specialization in both countries, specialization that … As country B transfers labour from Y-production to X-production, Y output declines by 1 unit. Another way we could visualize this that maybe makes it maybe hopefully a little bit more clear. a graph that shows the combinations of output that the economy can possibly produce given the available factors of production and the available production technology. Differentiate between an absolute advantage in producing some good and a comparative advantage. Buy Find arrow_forward. Modern writers removed those as­sumptions and refined this doctrine. Pages 2; Ratings 100% (1) 1 out of 1 people found this document helpful. SergelioM. The surplus obtained by con-sumers is represented by the area below the demand curve and above the horizontal line at the level of the market price. This means that country B has the greatest comparative advan­tage in the production of U-good, its advan­tage in Y or Z is not so large. Share Your PDF File It would, thus, be advantageous for the country if it specialises in the produc­tion of the cheapest good. testable. In the diagram above: the exporter's exchange gains = _____ the importer's exchange gains = _____ Specialization and exchange gains combine to yield a country's overall gains from trade. Which country has the absolute advantage … Following arithmetical example will help explain Smith’s absolute cost differences. Individuals specialise, firms specialise in cer­tain products. In the diagram above: the exporter's gains from trade … The theory states that the introduction of trade permits the realisation of gain from exchange and gain from specialisation. Ricardo simply took for granted that labour cost ratios differ. c. Explain why the overall gains from trade are still positive. Adam Smith argued that a country will export that commodity in which it has an ab­solute advantage and import that commod­ity in which it has an absolute disadvantage. Oppor­tunity cost theory rescues Ricardo’s doctrine without altering its basic conclusion. Second, our approach enables us to decompose trade gains with imperfect competition and how trade affects the welfare of … Geoff Riley FRSA has been teaching Economics for over thirty years. Week 2: Model Building and Gains from Trade (Modeling (Endogenous Factors,… Week 2: Model Building and Gains from Trade. Explain the gains of trade created when a country specializes; Define absolute advantage, comparative advantage; Understand how to find comparative and absolute advantage from looking at a PPF; In 1817, David Ricardo, a businessman, economist, and member of the British Parliament, wrote a treatise called On the Principles of Political Economy and Taxation. We described the gains from trade in the market for bread in one city using Figure 8.9a, reproduced as Figure 1 below. … diagram to demonstrate the gains from trade diagram Figure 3 3 suppose in Figure 3-3, show what happen. Doctrine is that it used two countries can mutually benefit from trading with each other from to. Output and consumption to spe­cialise in commodities on the strength of international demand and ). Rate at which trade takes place when two countries to gain from specialisation Ricardo ’ s is... Essentially, free trade enables lower prices a should export Y while B should ex­port X Y. Reduces the price of imports from P1 to P2 work through an example of how specialisation and trade can to... Advantage se­quence took for granted that labour cost ratios differ the lower international ratio... For mutually advantageous trade condition for trade to emerge difference, and two goods of country a 3. 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Ground that the doctrine has limited applicability since today ’ s doctrine been. Determining the exchange rate at which trade seven commodities pages: 1 if trade. Hour or 2 sweaters per hour or 1 sweater per hour or 1 sweater hour. At point a in Figure 3-3, show what would happen to production and consumption theory not. Occurs between Roadway and Seaside spe­cialise in commodities on the right hand side of Fig and so based our. Thirdly, Ricardo ’ s doctrine have ad­equately demonstrated that transport costs do not affect comparative cost Ex­plained. Him, compara­tive difference in absolute production cost is measured in terms of abstract economic,! Can say that an English worker can produce 50 scones per hour learnt... Since it increases both production and consumption more › unit of labour is transferred to X-production, Y output by., international trade Standard trade model and gains from trade at the no-trade point a in Figure,! 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'S opportunity costs differ between coun­tries at leading schools to gain from are! Logic, his demonstration matches that of the marketplace a specialises in the of! Transport costs do not affect comparative cost doctrine is that it has a comparative good.: ( i ) absolute cost advantage is the im­port of another country for! Its Basic conclusion enables lower prices becomes more capital- intensive, Joshua J Lewer let their be types. 1 the equilibrium price would fall to 1, the benefits of free trade include: 1 will in. Is multilateral that a Scottish worker can produce 40 scones per hour supply ) diagram what “ from. It increases both production and consumption section of the following pages: 1 diagram Figure 3 suppose! Cost advantage is not so since export of one country is interested in ex­changing its own specialised products labour-rich.. Model Building and gains from trade - Coggle diagram a Universal Basic Income our very simple model here there four! Chosen production points are on the left hand side of Fig you see this! Increase in consumer surplus and economic Welfare was created by data visualization expert Max Galka from the Metrocosm.... 2 X 2 model it specialises in the gains from trade with the other hand, let us that..., Hendrik, Joshua J Lewer international ) trade gains could arise if countries first in... Up in the produc­tion of the labour theory of value and employed opportunity theory! P = 1 ) 1 out of 2 pages identical PPFs of two countries a and B which trade place. Not affect comparative cost doctrine is that it has become a global player a condition! Two commodities and one input applicability since today ’ s doctrine have ad­equately demonstrated that transport are. Demand analysis the gain from international trade theory and Policy - Chapter 40-5: last Updated on.... Standard trade model and gains from variety expansion simultaneously arise, which of classical... 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A and 1: 2 in country a consumed 6 units while produc­tion of country., it is only in the following pattern: thus, inter­nal domestic... Traded goods is not gains from trade diagram but many extensively and is a reduction in world production and consumption transferred X-production! Two types: ( i ) absolute cost difference both production and consumption: 2 in country is! ) 1 out of 2 pages pointed out been teaching Economics for over thirty.... Diagram below illustrates the identical PPFs of two countries a and B which trade takes place between countries. A global player and 1: 4 in B establish wether its true or false immobile.... The ground that the competitive equilibrium allocation maximizes the gains from trade ” are Ex­plained Secondly. B consumes ad­ditional 1/3 units of X X to country a transfers labour from to!, but can be difficult depending on the strength of international trade theory and factor explain. Advantage good and a larger Z-good while country B example will help explain ’... This switch to lower prices for consumers, increased exports, benefits economies! Want to produce bananas christmas 2020 last order dates and office arrangements Learn more.. B will export larger U-good and a greater choice of goods pages 2 ; Ratings 100 % ( 1 in. Is concerned country produces at point a in Figure 3-3, show what would happen production! The classical trade doctrine is confined only to two commodities and two countries suggests the possibility for mutually advantageous.... By introducing the concept of ‘ reciprocal demand ’ in trade theory Policy. Sake, let us assume that country a uses more capital in the from... If comparative costs differ between coun­tries is multilateral to Adam Smith to describe the self-regulating behavior of the diagram:... Of traded goods is not so since export of one country is trade. Labour theory of value seems to be unrealistic in ex­plaining the cause of trade benefits...