Question

1. The following are the implications about the Gains from Trade Model in the case of 2 economies, EXCEPT:

a) By specializing and trade based on Comparative Advantages, both economies can attain Efficiency and Optimality.

b) Economies that are Labor abundant should specialize in the kind of production that is Labor intensive.

c) Even if only one economy initially benefits from trade, a pareto optimal agreement where both economies benefit is likely to occur.

d) If an economy has Absolute Advantage in all kind of production, that economy cannot benefit from trade.

Answer 1

Absolute Advantage:- It basically refers to the ability of a country to produce certain goods/ products more efficienty and more productively with respect to other countries. So when one country/ economy is good in production of one good, with respect to other country/ economy, then the trade between the two countries will increase or we can say consumption will increase due to low pricing, because one nation can produce the good with lower marginal cost.

Statement D is wrong.

Statement A is correct, as the trade based on comparative advantage, will increase the optimality and efficiency between the two economies, based on lower opportunity cost.

Statement B is correct, in labour intensive economies, cost of production is low, due to availability of cheap labour force.

Statement C is correct, because pareto optimal agreement, will make the situation of one country worse if others is improved.