In the absence of trade between a small country and the rest of the world,product X costs 1/3 as much per-unit as does product Y in the small country.However,in the world market X and Y trade at equal prices.If trade were now made possible between the small country and the rest of the world:
A)the small country would adjust by importing X.
B)the small country would adjust by exporting X.
C)the small country would end up importing both Y and X from the rest of the world.
D)the rest of the world would not find it advantageous to trade with the small country.

Question

Quizplus · Accepted Answer

Since product X costs less in the small country compared to its world market price, the small country has a comparative advantage in producing X. Therefore, it would export X to the rest of the world where X is more expensive.

In the Absence of Trade Between a Small Country and the Rest