Under free trade Canada would not realize any gains from trade with Sweden if Canada:
|a. Trades at Canada’s marginal rate of transformation.|
b. Trades at Sweden’s marginal rate of transformation.
c. Specializes completely in the production of its export good.
d. Specializes partially in the production of its export good.
The Correct Answer Is:
a. Trades at Canada’s marginal rate of transformation.
Correct Answer Explanation: a. Trades at Canada’s marginal rate of transformation.
Under free trade, countries aim to maximize their gains from trade by producing and exporting goods in which they have a comparative advantage, and importing goods in which they have a comparative disadvantage. A comparative advantage arises when a country can produce a good at a lower opportunity cost than its trading partner.
In this scenario, if Canada trades at its marginal rate of transformation, it means that it is producing and exchanging goods based on its comparative advantage. The marginal rate of transformation (MRT) is the rate at which a country can give up the production of one good in order to produce more of another good while utilizing its resources efficiently.
By trading at Canada’s MRT, both Canada and Sweden will be able to specialize in the production of the goods they are relatively more efficient at producing. This will lead to an efficient allocation of resources and an increase in overall economic welfare for both countries.
Now, let’s discuss why the other options are not correct:
b. Trades at Sweden’s marginal rate of transformation:
If Canada were to trade at Sweden’s marginal rate of transformation, it would mean that Canada is producing and exchanging goods based on Sweden’s comparative advantage. This would be suboptimal for Canada because it would not be producing goods in which it has a comparative advantage.
Comparative advantage is a fundamental principle of international trade, and it suggests that countries should specialize in producing the goods they can produce at a lower opportunity cost. By trading at Sweden’s MRT, Canada would be forgoing the opportunity to allocate its resources in the most efficient manner.
Additionally, if Canada traded at Sweden’s MRT, it may end up producing goods for which it is not as efficient as Sweden. This could lead to lower overall productivity and potentially reduced economic welfare for both countries.
c. Specializes completely in the production of its export good:
If Canada were to completely specialize in the production of its export good, it would mean that it is putting all its resources and effort into producing only one type of good. While specialization can lead to increased efficiency, complete specialization can also be risky.
It leaves the economy vulnerable to changes in global demand or supply chain disruptions related to that particular good.
Furthermore, by exclusively focusing on one export good, Canada might miss out on the opportunity to produce other goods in which it may also have a comparative advantage. This could lead to a less diversified economy, which can be less resilient in the face of economic shocks.
d. Specializes partially in the production of its export good:
Partial specialization can be a step in the right direction, but it may still not lead to the most efficient allocation of resources. If Canada only partially specializes in the production of its export good, it means that it is still allocating some of its resources towards the production of other goods.
While this approach allows for some diversification, it may not be as efficient as trading at Canada’s own marginal rate of transformation.
Partial specialization may lead to gains from trade, but they would likely be less than if Canada were to fully specialize in the goods it has a comparative advantage in. It would not fully capture the benefits of producing the goods where Canada has the greatest efficiency.
In summary, trading at Canada’s marginal rate of transformation allows for the most efficient allocation of resources, ensuring that Canada produces and exchanges goods based on its comparative advantage. This approach maximizes the gains from trade and leads to a more efficient use of resources and overall economic benefits.