Consider the following information about the production of two goods,X and Y,in two countries,A and B:
∙ In Country A it takes X a units of resources to produce one unit of X and Y a units of resources to produce one unit of Y.
∙ In Country B it takes X b units of resources to produce one unit of X and Y b units of resources to produce one unit of Y.
∙ Assume the amount of resources used to produce the goods in the two countries can be compared unambiguously.
-Refer to Table 32-1.There is no scope for gains from trade due to specialization between the two countries if

Question

Quizplus · Accepted Answer

For there to be gains from trade due to specialization, the opportunity cost of producing X must be lower in one country compared to the other, while the opportunity cost of producing Y must be lower in the other country. The opportunity cost is determined by the amount of resources required to produce each good, as given in the information. Comparing the ratios X_a/Y_a and X_b/Y_b, if they are not equal, then one country will have a lower opportunity cost for producing X, while the other country will have a lower opportunity cost for producing Y. Therefore, there will be scope for gains from trade due to specialization. Choice A is incorrect because a higher ratio indicates a higher opportunity cost for producing X in one of the countries, which could lead to gains from trade. Choice B is incorrect because it does not compare the opportunity cost of producing Y in the two countries. Choice D is incorrect because it implies that one country has a lower opportunity cost for both X and Y, which would not lead to gains from trade due to specialization. Choice E is also incorrect for the same reason as Choice A.

Consider the Following Information About the Production of Two Goods,X