Question

Consider the no-trade input/output situation presented in the following table and graph for countries A and

B. Assuming that free trade is legal; develop a scenario that will benefit the citizens of both countries.
A. Country B should make all the textiles and trade with Country A for food.
B. Country A should make nothing but textiles and trade with Country B for food.
C. Country B should make all the textiles and Country A should make all the food.
D. Country B should make nothing but textiles and trade with Country A for food.

Answer 1

Even when one country has an absolute advantage in all products, trade can still benefit both sides because gains from trade come from specializing in one's comparative advantage.

Step-by-step explanation:

In the situation where one country has an absolute advantage in everything, there can still be gains from trade. Even though the high-income country can produce all products with fewer resources, trade can still benefit both sides because gains from trade come from specializing in one's comparative advantage.

For example, let's consider a scenario where Country A has an absolute advantage in producing both textiles and food compared to Country B. Despite this, both countries can still benefit from trade if they specialize in their comparative advantages. If Country B focuses on producing textiles and trades with Country A for food, and Country A focuses on producing food and trades with Country B for textiles, both countries can maximize their production and consumption possibilities.

This is because by specializing in their comparative advantages, both countries can allocate their limited resources more efficiently, leading to increased overall output and higher living standards for their citizens.