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How are domestic prices determined in the absence of trade between two countries?

In autarky, i.e. under no trade situation, the domestic prices are determined by equating the price ratio with the slope of the PPF, i.e. MRTS. Suppose an economy is producing two goods – X and Y and labour is the only factor of production there. Let aLX and aLY are the…

cients of production of X and Y. Then the equilibrium price ratio is pX/pY = aLX/aLY. Thus the equilibrium price ratio is determined. Since in a closed economy, there are no signs of international trade, the equilibrium is determined by equating demand with supply. By equating demand with supply, we will get the equilibrium price and quantity.

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