Chapter 4, Problem 7MCQ

To determine

The question requires us to determine the cause of mutually beneficial trade between two countries.

Explanation of Solution

The country with a lower opportunity cost of producing a product will have a comparative advantage in producing that product while the country with high production of a product in absolute terms will have an absolute advantage in producing that product.

When country A has a comparative advantage in producing one good and is considering trade with another nation, then both countries should have specialization in producing something.

If two countries are considering trading, then a mutually beneficial trade is possible when both nations have specialization in producing one product at least.

Thus, option “c” is correct.

The other options are incorrect because:

• If a country can produce more of everything, then it prefers not to trade with other nations as it is self-sufficient.<
• Two identical production possibilities curves represent the same opportunity cost which means countries are specialized in the production of the same product. So, trading will not be beneficial.
• The similar size of nations is not saying anything about trade and specialization.<
• Not having an absolute advantage in the production of a product doesn’t mean that nation has specialization in producing something. So, mutually beneficial trade can’t be determined.