There will be no gains from specialization and trade between two countries if
1) neither country has an absolute advantage in the production of any good;
2) neither country has a comparative advantage in the production of any good;
3) opportunity costs differ too much between the two countries.

Question

Quizplus · Accepted Answer

The gains from specialization and trade arise from comparative advantage, which means that one country can produce a specific good or service at a lower opportunity cost than another country. Since neither country has a comparative advantage in the production of any good, there would be no gains from specialization and trade. Option 1 is not correct because even if neither country has an absolute advantage, they can still have a comparative advantage. Option 3 is partially correct because if the opportunity costs differ too much and there is no overlap in their production possibilities, then there would be no gains from trade, but this is not the only condition required.

There Will Be No Gains from Specialization and Trade Between