The two-country general equilibrium (PPF/indifference curves) model shows that when two countries open their economies and trade freely:

Question

Quizplus · Accepted Answer

The terms of trade, when two countries open their economies and trade freely, will indeed settle somewhere between the pre-trade relative price ratios of the two countries. This is because each country will export the goods for which it has a comparative advantage, and import the goods for which it has a comparative disadvantage, leading to a new equilibrium price ratio that falls between their initial relative price ratios. This allows both countries to gain from trade, contrary to options B and C, which suggest that one country may not benefit or that consumption patterns remain unchanged in one country.

The Two-Country General Equilibrium (PPF/indifference Curves) Model Shows That When