Final answer:
In a simplified model with two countries, it is more realistic to assume diminishing returns to specialization when applying the theory of comparative advantage. This is because as a country specializes more in a particular good, the additional resources devoted to producing that good will yield diminishing marginal returns, resulting in a smaller increase in output from each additional unit of resources.
Step-by-step explanation:
The theory of comparative advantage suggests that countries should specialize in producing goods in which they have a comparative advantage and trade with other countries to obtain goods in which they have a comparative disadvantage. In a simplified model with two nations, it is more realistic to assume diminishing returns to specialization because as a country specializes more in a particular good, the additional resources devoted to producing that good will yield diminishing marginal returns. This means that the increase in output from each additional unit of resources will become smaller and smaller.
For example, let's consider two countries: Country A and Country B. Country A has a comparative advantage in producing cars, while Country B has a comparative advantage in producing computers. Initially, when both countries start specializing in their respective goods, the increase in output will be significant. However, as more resources are devoted to producing cars in Country A, the additional output gained from each additional unit of resources will decrease. This is because there is a limit to how much more output can be achieved by allocating more resources to car production. The same applies to Country B and computer production.
Therefore, in a simplified model with two nations, it is more realistic to assume diminishing returns to specialization, as the increase in output from additional specialization becomes smaller and smaller. This concept is important to consider when analyzing the potential gains from trade and the distribution of production across nations.