PRODUCT QUALITY AND THE THEORY OF COMPARATIVE ADVANTAGE

We develop a simple model to investigate the possibility that two coun tries that differ significantly in income levels may be unable to gain from trading with each other. We consider two countries with identica l preferences and different technologies. There are two types of goods : one homogeneous, and one quality-differentiated. We show that if one country has an absolute advantage in both types of goods, then no tra de may be possible between the two countries, despite differences in r elative autarky prices.