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IAI Actuarial Core Principles · Business Economics · Importance of international trade

A country has an absolute advantage in producing every good compared with its trading partner. According to the theory of comparative advantage, what follows?

Trade can still benefit both countries, because gains arise from differences in opportunity costs rather than absolute productivity. Each country specialises in the good where its opportunity cost is lower and trades for the other, leaving both with more consumption.

  1. ATrade is not beneficial to either country
  2. BTrade can still benefit both countries if opportunity costs differCorrect
  3. COnly the less productive country gains from trade
  4. DThe more productive country should produce every good itself
  5. Trade benefits both only if the countries have identical opportunity costs

Explanation

Gains from trade depend on differences in opportunity costs, not on absolute productivity. Even a country better at everything has a lower opportunity cost in some good, so specialising and trading raises the output available to both. Identical opportunity costs would remove the gains, which is the opposite of option 5.

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