📚 Learning Guide
Understanding Comparative Advantage
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In a market where two countries specialize based on their comparative advantages, what is likely to happen to the overall market equilibrium when they engage in trade?

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Learning Path

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Choose the Best Answer

A

The total production of goods decreases.

B

The market equilibrium price will remain the same.

C

The total production of goods increases.

D

Trade will have no effect on market equilibrium.

Understanding the Answer

Let's break down why this is correct

Answer

When two countries specialize based on their comparative advantages, they focus on producing goods that they can make most efficiently. This means each country will produce what they are best at, leading to an increase in overall production. When they engage in trade, they can exchange their specialized goods, which allows both countries to access a wider variety of products at lower costs. For example, if Country A is great at making cars and Country B excels in making computers, they can trade cars for computers, benefiting from each other's strengths. As a result, the overall market equilibrium improves because there is more total output and consumers have more choices.

Detailed Explanation

When countries trade based on what they do best, they can produce more goods together. Other options are incorrect because Some might think that trade makes less stuff; It's a common mistake to think prices stay the same with trade.

Key Concepts

trade
market equilibrium.
Topic

Understanding Comparative Advantage

Difficulty

medium level question

Cognitive Level

understand

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