Assume that the two nations described below produce only the goods listed. What will be the result of opening the door to free trade?
A)A will export both X and Z to B.
B)A will import X and export Z.
C)A will export X and import Z.
D)A will import both X and Z.
E)No trade will take place.

Question

Assume that the two nations described below produce only the goods listed. What will be the result of opening the door to free trade? 
A)A will export both X and Z to B. 
B)A will import X and export Z. 
C)A will export X and import Z. 
D)A will import both X and Z. 
E)No trade will take place.

Quizplus · Accepted Answer

Country A has a comparative advantage in producing product X because its opportunity cost is lower than Country B's. Similarly, Country B has a comparative advantage in producing product Z because its opportunity cost is lower than Country A's. Therefore, if the two countries open up to free trade, Country A will export X to Country B and import Z from Country B. Country B will export Z to Country A and import X from Country A. This will lead to both countries benefiting from trade and increased efficiency in production.

Assume That the Two Nations Described Below Produce Only the Goods