Which of the following statements correctly describes international trade in accordance with comparative advantage?
A)Trade is impossible unless there exists a purely competitive market for foreign exchange.
B)Trade makes all the citizens of the trading countries better off,which is a clear example of a Pareto improvement.
C)Trade may well make some citizens in each trading country worse off.
D)Trade requires the judicious application by government of tariffs and quotas in order to discourage production according to comparative disadvantage.
E)Trade requires that the economies of the trading partners be of roughly equal size (United States versus Andorra just does not work).

Question

Quizplus · Accepted Answer

According to comparative advantage, countries specialize in producing and exporting goods that they can produce at a lower opportunity cost than others. This leads to an increase in overall world output and welfare. However, some citizens in each trading country may be worse off due to job displacement or changes in prices. Therefore, statement C is the correct description of international trade under comparative advantage. The other statements are either incorrect, incomplete or irrelevant.

Which of the Following Statements Correctly Describes International Trade in Accordance