The gains from international trade are closely related to:

 Options:

The Correct Answer Is:

b. How much the autarky price differs from international terms of trade change

Correct Answer Explanation: b. How much the autarky price differs from international terms of trade change

The gains from international trade are closely related to option b: “How much the autarky price differs from international terms of trade change.” This is because international trade allows countries to specialize in producing goods and services in which they have a comparative advantage, and then exchange them with other countries.

The autarky price refers to the price of a good or service in a closed economy that does not engage in international trade. The international terms of trade change refers to the ratio at which two countries exchange their goods in international markets.

When a country engages in international trade, it can benefit from the differences in relative prices between the domestic market and the international market. If a country can export a good at a higher price in the international market compared to the price it could obtain domestically in a closed economy (autarky), then it stands to gain from trade.

Similarly, if a country can import a good at a lower price from the international market compared to the price it would cost to produce domestically, it also stands to gain.

Now, let’s discuss why the other options are not correct:

a. The labor theory of value:

The labor theory of value, proposed by classical economists like Adam Smith and David Ricardo, suggests that the value of a commodity is determined by the amount of labor required to produce it. However, this theory does not directly relate to the gains from international trade.

In the context of international trade, what matters is not just the amount of labor, but also factors like comparative advantage, which considers the opportunity costs of producing one good versus another.

Additionally, international trade can be influenced by various other factors such as economies of scale, technological advancements, and resource endowments, which may not necessarily align with the predictions of the labor theory of value.

c. The fact that a country must lose from trade:

This statement is not accurate. In fact, international trade can lead to mutual gains for participating countries. This is based on the principle of comparative advantage, which states that countries should specialize in producing goods and services in which they have a lower opportunity cost relative to their trading partners.

When countries specialize and trade, they can achieve a higher overall level of economic welfare compared to a scenario where they try to produce everything domestically. Both countries can benefit from the exchange, leading to a win-win situation.

d. All of the above:

This option is incorrect because it includes options a and c, which have been shown to be incorrect. Including them in the correct answer would lead to a misleading and inaccurate statement.

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