📚 Learning Guide
Specialization and Trade
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Which scenario best illustrates how comparative advantage can lead to mutual benefits in international trade agreements?

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Choose the Best Answer

A

Country A specializes in producing coffee while Country B focuses on manufacturing electronics, both benefiting from trade.

B

Country A imposes tariffs on all goods from Country B, hindering trade.

C

Both countries produce the same goods equally well without trading.

D

Country A and Country B both decide to produce only agricultural products.

Understanding the Answer

Let's break down why this is correct

Answer

Comparative advantage means each country is better at producing something at a lower opportunity cost, even if one country is better at everything. For example, if Country A can grow rice and wheat but is relatively better at rice, while Country B is better at fishing, each should focus on what they can produce most efficiently. Country A specializes in rice and exports it to Country B, and Country B specializes in fish and exports it to Country A. By trading, both countries end up with more rice and fish than they could produce alone, so both benefit. This simple swap shows how trade based on comparative advantage can create mutual gains.

Detailed Explanation

When a country focuses on producing a good it can make more cheaply, it saves time and money. Other options are incorrect because Tariffs do not show comparative advantage; they actually block trade and hurt both economies; Doing the same work in both countries does not create a trade advantage.

Key Concepts

Comparative Advantage
International Trade Agreements
Topic

Specialization and Trade

Difficulty

medium level question

Cognitive Level

understand

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