[Multiple choice questions (5 points each, 25 points in total)]: There are two c

Question

[Multiple choice questions (5 points each, 25 points in total)]: There are two countries Home and Foreign and two goods X and Y. Please answer the following questions. True or False? No. Statements 1It is possible that one country has absolute advantage in producing both goods. 2 It is possible that one country has comparative advantage in producing both goods. 3If a country has comparative advantage in producing good X, then the country exports good X for If a country has absolute advantage in producing good X, then the country exports good X for sure 4 5 The international relative price needs to be between the two closed-economy relative prices in the two countries in order for the two countries to have incentive to trade.

Explanation / Answer

1) True

Absolute advantage is the ability of a country to produce a good or service at a lower per unit cost as compared to any other country that produces same good or service. It is possible that one country is able to produce more of both goods.

2) False

A country has a comparative advantage in producing that good if the opportunity cost of producing that good is lower in that country as compared to another country. A country is not able to produce both goods with lower opportunity cost.

3) True

A country will export that good in which it has comparative advantage over other country.

4) False

It is not necessary that a country will export that good in which it has an absolute advantage. Country will export that good in which it has comparative advantage.

5) True

Two countries will engage in trade when relative price is between the closed economy relative prices.

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