Consider the following statements: I. Relative to a no-trade situation, if the United States exported wheat, the U.S. domestic wheat price would rise and domestic production of wheat would expand. II. Relative to a no-trade situation, international trade causes prices of all goods to rise.
A) I is true; II is false.
B) I is false; II is true.
C) Both I and II are true.
D) Both I and II are false.

Question

Quizplus · Accepted Answer

Statement I is true because when a country exports a certain good, the domestic price rises due to the increased demand and the expansion of production also occurs as producers are incentivized to produce more to take advantage of the high prices. Statement II is false because while trade may cause prices of some goods to rise due to increased demand, it may also cause prices of other goods to fall due to increased competition and efficient production. Therefore, not all prices will rise due to trade.

Consider the Following Statements: I