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

Which is the best reason why an economy with an absolute disadvantage in every good can still gain from international trade?

Such an economy can still gain because its opportunity costs differ from its partner's, giving it a comparative advantage in some good. By specialising there and trading, both countries can consume more than they could alone, even if one is less productive everywhere.

  1. AIts exports will always be cheaper in foreign currency
  2. BTariffs on imports offset its lower productivity
  3. CIts opportunity costs differ from its partner's, so it has a comparative advantage in some goodCorrect
  4. DAbsolute advantage only matters for services, not goods
  5. Its wage rates must be higher than its trading partner's

Explanation

Opportunity costs of two goods cannot be higher in both goods for the same country relative to its partner, so each country has a comparative advantage in something. Specialising there and trading allows consumption beyond its own production possibilities. Absolute productivity gaps do not remove this.

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