Question

Assume that transportation costs are especially high for Widgets in the two-country, two-product Ricardian model, and Country A enjoys a comparative advantage in Widgets, then A) country B must also enjoy a comparative advantage in Widgets. B) country B may end up exporting Widgets. C) country A may switch to having a comparative advantage in the other good. D) country A will still export Widgets. E) trade may be impossible between the two countries.

Answer 1

D

Step-by-step explanation:

A country has comparative advantage in production if it produces at a lower opportunity cost when compared to other countries. A country would export the good for which it has a comparative advantage and import the good for which it doesn't have a comparative advantage

For example, country A produces 10kg of beans and 5kg of rice. Country B produces 5kg of beans and 10kg of rice.

for country A,

opportunity cost of producing beans = 5/10 = 0.5

opportunity cost of producing rice = 10/5 = 2

for country B,

opportunity cost of producing rice = 5/10 = 0.5

opportunity cost of producing beans = 10/5 = 2

Country A has a comparative advantage in the production of beans and country B has a comparative advantage in the production of rice

Country A would export beans to country B and B would export rice to A