Relative prices in the two-good model

This equilibrium representing autarky is a theoretical benchmark. In the real world, there are over 190 countries listed as members of the United Nations, and most of them are engaged in mutually beneficial trade with each other. Technological ideas and know-how spread quickly enough to consider them available across countries, but countries differ in their respective endowments of skilled and unskilled labour, physical and financial capital, and resources embodied in or grown on the land (including resort assets like skiable hills and attractive beaches).

To check whether trade can benefit a country whose demand or output is too small to influence the prices of goods in global markets, look at the value of its goods before trade happens, in autarky. The country’s endowments of factors of production can be the source of its export opportunity or comparative advantage.

Capturing the opportunity cost of clothing in terms of food as a single ratio or slope is convenient because the dollar prices of the individual goods can be left unknown; also, the issue of foreign exchange can be swept to the background. Only the relative price is required to see whether beneficial trade is possible for the country in autarky. The change in relative prices and the value of national income expressed in terms of, say, the a quantity of the untraded good are useful benchmarks for evaluating policy choices as the country opens up to trade.