If one country's wage level is very high relative to the other's (the relative wage exceeding the relative productivity ratios)then it is probable that
A) free trade will not improve either both countries welfare.
B) free trade will result in no trade taking place.
C) free trade will result in each country exporting the good in which it enjoys comparative advantage.
D) free trade will result in each country exporting the good in which it suffers the greatest comparative disadvantage.
E) free trade will not affect the economic welfare of either country.

Question

Quizplus · Accepted Answer

If one country has a higher wage level than another country, it may have a comparative advantage in producing goods that rely more on skilled labor. This means that it may be more efficient for that country to produce those goods and export them to the other country. In turn, the other country may export goods that rely more on unskilled labor. This specialization and trade can increase the overall welfare of both countries by allowing them to consume more than they could produce on their own. Therefore, free trade will result in each country exporting the good in which it enjoys comparative advantage.

If One Country's Wage Level Is Very High Relative to the Other's