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, countries should specialize in producing the goods in which they have a lower opportunity cost and trade with other countries to obtain the goods that they have a higher opportunity cost in producing. In this scenario, country A has a lower opportunity cost in producing food since they only have to give up one unit of food to produce two units of textiles, while country B has a lower opportunity cost in producing textiles since they only have to give up one unit of textiles to produce two units of food.

Therefore, it would be beneficial for country A to specialize in producing textiles and trade with country B for food, and for country B to specialize in producing food and trade with country A for textiles. This would result in an increase in overall production and consumption for both countries.

Countries a and B Currently Consume 400 Units of Food