Two countries will choose to specialize and trade only if:
A) the terms of trade fall between their opportunity costs for producing the goods on their own.
B) the opportunity costs are the same for the two nations.
C) the opportunity costs are astronomically high for producing the goods on their own.
D) one country possesses the absolute advantage in both goods, but the comparative advantage in only one good.

Question

Quizplus · Accepted Answer

In order for two countries to choose to specialize and trade, it must be the case that the terms of trade fall between their opportunity costs for producing the goods on their own. This means that both countries can benefit from trade by specializing in the goods they have a comparative advantage in producing and then exchanging those goods at a mutually beneficial rate. If the opportunity costs were the same for both countries or astronomically high, then there would be no advantage to specializing and trading. If one country possessed the absolute advantage in both goods, then it would have no incentive to trade because it could produce both goods more efficiently on its own. The key is that both countries must have a comparative advantage in different goods in order to benefit from trade.

Two Countries Will Choose to Specialize and Trade Only If