Multiple Choice
The theory of comparative advantage exists because:
1
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2. Introductory Economic Models
PPF - Comparative Advantage and Trade
Multiple Choice
Why can two countries benefit from trade even if one country is more efficient at producing everything?
A
Because of comparative advantage: each country specializes in the good it can produce at lower opportunity cost and trades to obtain the other good.
B
Because trade forces both countries to have identical production possibility frontiers, eliminating inefficiencies.
C
Because the more efficient country uses its absolute advantage to produce everything cheaper and exports enough to buy all imports, so both benefit.
D
Because by trading, countries can avoid specializing and instead import all goods they don't produce, keeping full diversification.
Verified step by step guidance1
Step 1: Understand the concept of absolute advantage, which means a country can produce more of a good with the same resources compared to another country.
Step 2: Learn about comparative advantage, which focuses on the opportunity cost of producing goods, meaning a country should specialize in producing the good for which it has the lowest opportunity cost, even if it is less efficient in absolute terms.
Step 3: Recognize that trade allows countries to specialize according to their comparative advantages, leading to more efficient overall production and higher total output.
Step 4: See that by specializing and trading, both countries can consume beyond their individual production possibility frontiers, gaining from trade.
Step 5: Conclude that the key reason two countries benefit from trade, even if one is more efficient at producing everything, is because of comparative advantage, not absolute advantage.
Related Practice
