Suppose Mexico has a comparative advantage relative to the United States in the manufacture of clothing and the United States has a comparative advantage in producing agricultural products. Which of the following is most likely to occur?
A) Mexico and the United States will not trade agricultural products or clothing.
B) Mexico will sell clothing to the United States and the United States will sell agricultural products to Mexico.
C) Mexico will sell agricultural products to the United States and Mexico will buy clothing from the United States.
D) Mexico will sell clothing to the United States but not buy any agricultural products from the United States.

Question

Quizplus · Accepted Answer

According to the theory of comparative advantage, both countries can benefit from specialization and trade. Mexico will focus on producing clothing, while the United States will focus on producing agricultural goods. Mexico will sell clothing to the United States, and the United States will sell agricultural products to Mexico, resulting in gains from trade for both countries. Option A is incorrect because it implies that trade will not occur, even though both countries have a comparative advantage in different goods. Option C is incorrect because it is the opposite of what is expected since Mexico has a comparative advantage in clothing. Option D is incorrect because it assumes that Mexico will not buy any agricultural products from the United States, which goes against the principle of gains from trade.

Suppose Mexico Has a Comparative Advantage Relative to the United