Refer to the above diagrams.The solid lines are production possibilities curves; the dashed lines are trading possibilities curves.The trading possibilities curves imply that:

Question

Quizplus · Accepted Answer

The trading possibilities curves reflect the gains from trade that can be achieved if the two countries specialize in producing the goods that they have a comparative advantage in, and then engage in trade. By doing so, they can consume more than they would be able to produce on their own, thereby achieving higher levels of economic welfare. This is a fundamental principle of international trade theory. Options A and B are incorrect because the trading possibilities curves do not necessarily reflect excess exports over imports or domestic misallocation of resources. Option D is incorrect because both nations can benefit from specialization and trade if they follow the principles of comparative advantage.

Refer to the Above Diagrams