Suppose that labor is the only productive resource needed.Scotland has a comparative advantage in producing firewood,while Iceland has a comparative advantage in producing wool.If the two nations trade with each other,

Question

Quizplus · Accepted Answer

According to the principle of comparative advantage, countries should specialize in producing and exporting goods that they can produce at a lower opportunity cost, which means giving up less of one good to produce more of another. In this scenario, Scotland has a lower opportunity cost of producing firewood compared to wool, while Iceland has a lower opportunity cost of producing wool compared to firewood. Therefore, Scotland should export firewood and Iceland should export wool, resulting in mutual gain from trade. Option C correctly identifies this concept. Option A and D are incorrect because they suggest the opposite export arrangement for each country, which would not be in line with their comparative advantages. Option B is incorrect because it suggests that Scotland should export both goods, which would not make sense if it has a lower opportunity cost in firewood production.

Suppose That Labor Is the Only Productive Resource Needed