Suppose that after specializing according to comparative advantage, a country is trading with another nation that also specializes according to its comparative advantage. Which of the following statements are true for the first country? i) It enjoys gains from trade. ii) It must have an absolute advantage in the production of the good it produces. iii) It is producing at a point beyond its PPF.
Social Studies · High School · Sun Jan 24 2021
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The correct statements for the first country, which is trading with another nation that also specializes according to its comparative advantage, are:
i) It enjoys gains from trade.
iii) It is producing at a point beyond its PPF.
Explanation:
i) The country enjoys gains from trade because specialization based on comparative advantage allows each country to produce the goods and services it can produce most efficiently, leading to a more efficient allocation of resources and increased overall output.
ii) It doesn't necessarily have to have an absolute advantage in the production of the good it produces. Comparative advantage is about the opportunity cost of producing a good relative to another. Even if a country does not have an absolute advantage in any good, it can still have a comparative advantage in producing one of the goods.
iii) The country is producing at a point beyond its Production Possibility Frontier (PPF) because specialization and trade allow it to consume a combination of goods that is not achievable through domestic production alone. Trade allows the country to access goods and services that lie outside its PPF.