If the autarky price of S were lower in country A than in country B, then if trade were allowed:
|a. A would likely export S to B.|
b. A would likely import S from B.
c. neither country would want to trade.
d. none of the above.
The Correct Answer Is:
a. A would likely export S to B.
The correct answer is (a) A would likely export S to B. To understand why this answer is correct, let’s delve into the concepts of comparative advantage and opportunity cost in international trade, and then discuss why the other options are not correct.
Explanation of the Correct Answer : a. A would likely export S to B.
In international trade, countries engage in the exchange of goods and services based on the principles of comparative advantage. Comparative advantage occurs when one country can produce a particular good more efficiently or at a lower opportunity cost than another country.
Opportunity cost refers to the value of the next-best alternative that must be given up when choosing to produce a particular good or service.
In this scenario, we are given that the autarky (closed economy) price of good S is lower in country A than in country B. This means that country A can produce good S more efficiently and with a lower opportunity cost compared to country B. As a result, country A has a comparative advantage in the production of good S.
When trade is allowed, both countries can benefit by specializing in the production of goods in which they have a comparative advantage and then trading these goods with each other.
Country A, with its comparative advantage in producing good S, will likely export S to country B because it can produce it more efficiently and at a lower cost. Country B, on the other hand, will focus on producing goods in which it has a comparative advantage, and this trade will lead to mutual benefits.
Now, let’s examine why the other options are not correct:
b. A would likely import S from B:
This option suggests that country A would import good S from country B if trade were allowed. However, this contradicts the information provided in the question, which states that the autarky price of good S is lower in country A than in country B.
In an autarky situation, each country produces and consumes goods without engaging in international trade.
Since country A can produce good S more efficiently and at a lower cost, there is no incentive for it to import it from country B. In fact, doing so would lead to higher costs for country A, which goes against the logic of comparative advantage and the principle of rational economic behavior.
c. Neither country would want to trade:
This option implies that neither country would find it advantageous to engage in trade even if it were allowed. However, this goes against the fundamental concept of comparative advantage. Comparative advantage exists when one country can produce a particular good at a lower opportunity cost than another country.
In this case, country A has a comparative advantage in producing good S, so it would benefit from specializing in its production and exporting it to country B. Similarly, country B would focus on producing goods in which it has a comparative advantage.
By trading, both countries can obtain goods at a lower opportunity cost than if they were to produce everything domestically, leading to increased overall welfare.
d. None of the above:
This option implies that none of the provided options are correct. However, as explained earlier, option (a) is indeed correct based on the principle of comparative advantage. The autarky price difference between the two countries provides a clear incentive for country A to export good S to country B.
In summary, options (b), (c), and (d) are not correct because they do not align with the economic principles of comparative advantage and rational decision-making.
It is important to consider the information provided in the question, which states that the autarky price of good S is lower in country A than in country B, and analyze how this information influences trade decisions between the two countries.
This information is central to determining the likely outcome of trade between the two countries.