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Trade between two countries can benefit both countries if:
A) each country exports that good in which it has a comparative advantage.
B) each country enjoys superior terms of trade.
C) each country has a more elastic demand for imported goods.
D) each country has a more elastic supply for the exported goods.
E) each country produces a wide range of goods for export.

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Sonal Bahl
Sonal BahlLv10
18 Sep 2020

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Related questions

Discuss and explain the difference between the two.

The principle upon which Adam Smith first claimed that free trade benefits all countries. It holds that a country benefits from trade when it produces a particular good at a lower cost (in terms of labor input) than it costs to produce the good in any other country. By specializing the in the production and export of this good and importing goods whose production costs are higher than in other countries, the country can consume more of both goods. In trade theories, this principle was later replaced by the principle of comparative advantages.

Comparative Advantage is first fully stated by David Ricardo in the early nineteenth century, this concept holds that a country has a comparative advantage in a good if it can produce that good more cheaply than it can produce other goods. By specializing in the production of goods in which it holds a comparative advantage and importing the other goods, the country can consume more of all goods. In contrast to Adam Smith, therefore, this principle states that a country need not have an absolute advantage in any good to benefit from trade. The principle provides a powerful justification for liberal international trade by asserting that all countries benefit from such trade.

Suppose that the U.S. and Brazil produce only two goods --- computer and coffee. The table below gives its production possibilities.

Computer Opp Cost Coffee Opp Cost

U.S.: 12 4

Brazil: 5 10

1. Draw the graphs of the production frontier for each country. Make sure that you level the diagram properly and indicate the name of the country under the graph.

2. What are the opportunity costs of producing each good in the two countries? List them in the table.

3. On which good each country has a comparative advantage?

4. Which country exports computers? Coffee?

5. What is the range of TOT in which only Brazil gains from trade?

6. What is the range of TOT in which only the U.S. gains from trade?

7. What is the range of TOT in which both countries gain from trade?

3. Assume that two countries, A and B, produce steel for export markets. Steel from both countries is regarded by world buyers asperfectly substitutable (so that steel from each country has tosell at the same price in the world market). To make the analysiseasier, assume that there is only one steel producer in eachcountry. Assume also that the marginal cost of producing a ton of steel in country A is $10 and in country B it is $11.

(a) If the two countries' producers play a Bertrand game in the export markets, what would be the Bertrand-Nash equilibrium price of steel?
(b) Now assume that the two countries are engaged in Cournot competition in the steel export market. With this assumption, can you calculate the world price of steel if the world (inverse)demand for steel is given by p = 100 - X, where X is the total supply of steel into the world market? [Hint: write down first-order conditions for profit maximization for each steel producer. This will give you two equations in two unknowns (which are each country's steel output). You can then solve for Cournot-Nash equilibrium output supplies.]
(c) Calculate shares of steel exports going to each country in the Cournot-Nash equilibrium. Now assume that country B decides to subsidize its country's steel export to the amount of $1 per ton. What will be the share of world exports of steel going to country B's manufacturer? What will happen to country A's exports of steel? What will happen to the world price of steel?

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