If trade opens up between the two formerly autarkic countries, Australia and Belgium, then
A) the real income of both countries will increase.
B) the real income of neither country will increase.
C) the real income of Australia but not of Belgium will increase.
D) the real income of Australia and of Belgium will increase.
E) the real income of both countries may increase.

Question

Quizplus · Accepted Answer

When trade opens up between two formerly autarkic countries, both countries can specialize in production of goods in which they have a comparative advantage and trade with each other. This can lead to an increase in consumption by both countries, leading to an increase in real income. However, the magnitude of this increase in real income will depend on factors such as the extent of specialization, trade barriers, and the elasticity of demand for goods. Therefore, it is possible that the real income of both countries may increase, making E the correct answer.

If Trade Opens Up Between the Two Formerly Autarkic Countries