Consider the two countries of Swala and Atlantis. Swala is a major producer of wheat and rice while Atlantis specializes in the production of marble and automobile parts. Engaging in free trade benefits both countries since Swala is an agrarian nation and Atlantis lacks arable land. This follows the theory of comparative advantage, and we can say that engaging in free trade benefits all countries that participate in it; however, this conclusion is based on which inaccurate assumptions?
A) We have assumed a simple world in which there are only two countries.
B) We have assumed the prices of resources and exchange rates in the two countries are dynamic.
C) We have assumed there are barriers to the movement of resources from the production of one good to another within the same country.
D) We have assumed that agrarian nations do not specialize in producing fertilizers.
E) We have assumed diminishing returns to specialization.

Question

Quizplus · Accepted Answer

The assumption of a simple world with only two countries is an inaccurate simplification, as real-world trade involves multiple countries with complex interactions.

Consider the Two Countries of Swala and Atlantis