Countries A and B currently consume 400 units of food and 400 units of textiles each and currently do not trade with one another.The citizens of country A have to give up one unit of food to gain two units of textiles,while the citizens of country B have to give up one unit of textiles to gain two units of food.Their production possibilities curves are shown. Under the theory of comparative advantage
A)The citizens of country A should make food and trade with the citizens of country B for textiles.
B)The citizens of country A should make textiles and trade with the citizens of country B for food.
C)There are no gains from trade in this example.
D)A is twice as good as B at making food and B is twice as good as A at making textiles.

Question

Countries A and B currently consume 400 units of food and 400 units of textiles each and currently do not trade with one another.The citizens of country A have to give up one unit of food to gain two units of textiles,while the citizens of country B have to give up one unit of textiles to gain two units of food.Their production possibilities curves are shown.  Under the theory of comparative advantage
A)The citizens of country A should make food and trade with the citizens of country B for textiles. 
B)The citizens of country A should make textiles and trade with the citizens of country B for food. 
C)There are no gains from trade in this example. 
D)A is twice as good as B at making food and B is twice as good as A at making textiles.

Quizplus · Accepted Answer

According to the theory of comparative advantage, a country should specialize in producing the good in which it has a lower opportunity cost and trade with other countries for the good in which it has a higher opportunity cost. In this case, the opportunity cost of producing textiles is lower for the citizens of country A (they have to give up fewer units of food to produce one unit of textiles) than it is for the citizens of country B. Thus, country A should specialize in producing textiles and trade with country B for food. This way, both countries can consume more of both goods than they could if they produced in isolation.

Countries a and B Currently Consume 400 Units of Food