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NEW QUESTION: 1
A nation can gain from international trade when:
I). the relative prices of the nation's products differ from those of other countries.
II). it imports goods for which it is a high-opportunity cost producer while exporting goods it produces at low opportunity cost.
A. I is true, II is false.
B. Both statements are true.
C. I is false, II is true.
Both of these statements are true. The law of comparative advantage implies that trading partners can be made better off if each specializes in the production of goods for which it is a low opportunity cost producer and trades for those goods for which it is a high opportunity cost producer. This situation will lead to a minimization of costs and a maximization of output. There must be differences in the relative prices of products across countries in order for this comparative advantage to be realized.
This is because the price of a good reflects the production costs. If all production costs were equal across countries then there would be no incentive to trade since each country can produce with equal efficiency.
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