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CA Foundation · Business Economics · International Trade

Which statement about gains from trade is correct?

Trade lets a country consume beyond its own production possibility frontier. By specialising according to comparative advantage and exchanging at terms of trade between the two domestic opportunity costs, it can obtain combinations of goods that it could not produce domestically.

  1. AA country gains from trade only if it has an absolute advantage in every product
  2. BTrade allows a country to consume beyond its production possibility frontierCorrect
  3. CGains from trade arise only for the country with lower labour productivity
  4. DTrade gains exist only when both countries have identical opportunity costs

Explanation

With specialisation and exchange at a favourable terms of trade, a country can reach a consumption point outside its own production possibility frontier. Gains rest on comparative, not absolute, advantage, so A is wrong. Identical opportunity costs would remove any basis for gain, so D is wrong. C is wrong since gains do not depend on being the less productive country.

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