(Table: Home and Foreign Prices for Manufacturing and Agriculture) Consider the information provided about the price of agriculture and manufacturing goods in two countries (Home and Foreign). Under free trade conditions, Foreign will export ________ goods and Home will export ___________ goods.
A) manufactured; agricultural
B) manufactured; manufactured
C) agricultural; manufactured
D) agricultural, agricultural

Question

(Table: Home and Foreign Prices for Manufacturing and Agriculture) Consider the information provided about the price of agriculture and manufacturing goods in two countries (Home and Foreign). Under free trade conditions, Foreign will export ________ goods and Home will export ___________ goods. 
A) manufactured; agricultural 
B) manufactured; manufactured 
C) agricultural; manufactured 
D) agricultural, agricultural

Quizplus · Accepted Answer

According to the theory of comparative advantage, a country will specialize in producing and exporting the goods in which it has a comparative advantage (i.e. lower opportunity cost). In this case, Home has a lower opportunity cost of producing manufactured goods, while Foreign has a lower opportunity cost of producing agricultural goods. Therefore, under free trade conditions, Foreign will export agricultural goods and Home will export manufactured goods.