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

Which of the following is a dynamic gain from international trade, as opposed to a static gain from specialisation?

Greater competition and larger markets that encourage innovation and economies of scale are dynamic gains. They raise productivity over time. Static gains, by contrast, come from a one-off reallocation of existing resources to goods with lower opportunity cost.

  1. AMoving production to the good with the lowest opportunity cost
  2. BLower prices from importing goods the country produces inefficiently
  3. CGreater competition and larger markets that encourage innovation and economies of scaleCorrect
  4. DA one-off reallocation of existing resources between industries
  5. A fall in the quantity of imports as domestic demand weakens

Explanation

Static gains come from reallocating existing resources according to comparative advantage. Dynamic gains are longer-term effects such as competition, innovation, technology transfer and economies of scale from larger markets.

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