Asked by tommy lindberg on May 04, 2024
Verified
Nation Alpha has a comparative advantage in product X, and nation Beta has a comparative advantage in product Y. Trade in the two products will only benefit the two nations if
A) the exchange ratio of X for Y is fixed.
B) the terms of trade increase in both nations.
C) there is excess capacity in both economies.
D) the exchange ratio for X and Y reflect their domestic opportunity costs.
Comparative Advantage
The ability for a particular individual, commercial entity, or country to produce a certain good or render a service with significantly less opportunity cost compared to opposition.
Domestic Opportunity Costs
The cost of forgoing the next best alternative use of a country's domestic resources.
- Explain the terms of trade and how they reflect comparative advantages between nations.
Verified Answer
KF
Karina FernandezMay 10, 2024
Final Answer :
D
Explanation :
The principle of comparative advantage suggests that nations benefit from trade if they specialize in the production of goods for which they have a lower opportunity cost and trade those goods for others. The exchange ratio (terms of trade) for the goods should reflect their respective domestic opportunity costs to ensure that both nations benefit from the trade. This allows each country to consume more than it would in isolation, enhancing overall economic welfare.
Learning Objectives
- Explain the terms of trade and how they reflect comparative advantages between nations.
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