Final answer:
When two countries have identical production possibility frontiers, gains from trade can still be realized if they specialize in goods for which they have the lowest opportunity costs, emphasizing the principle of comparative advantage over absolute advantage. The correct option is (C).
Step-by-step explanation:
If two countries have identical production possibility frontiers, the possibility exists that there is a set of prices at which both countries will gain from trade. This scenario assumes that although their production capacities are similar, the countries have different opportunity costs for producing certain goods.
When a high-income country has an absolute advantage in producing all goods, it might seem there are no gains from trade for a lower-income partner. However, gains from trade are not just about the absolute advantage; they are predominantly about the comparative advantage. Even if one country can produce everything more efficiently, both countries can still benefit from trade by specializing in the production where they have the lowest opportunity costs.
Specializing in areas of comparative advantage and engaging in trade allows countries to consume beyond their own production possibility frontiers.
Mutually beneficial trade is a core concept in the study of international economics and is foundational to understanding how and why global trade occurs between nations of varying levels of productivity and resource endowment. This exchange is rooted in the classic economic theory advanced by David Ricardo, emphasizing the importance of comparative advantage in trade.