Given a two-country and two-product world,the United States would enjoy all the attainable gains from free trade with Canada if it:
A) Trades at the U.S.rate of transformation
B) Trades at the Canadian rate of transformation
C) Specializes completely in the production of both goods
D) Specializes partially in the production of both goods

Question

Quizplus · Accepted Answer

In a two-country and two-product world, the principle of comparative advantage states that each country should specialize in the production of the good in which it has a lower opportunity cost, and trade with the other country. The rate of transformation refers to the amount of one good that must be given up to produce one unit of the other good. When a country trades at its rate of transformation, it is producing at the lowest opportunity cost. Therefore, the United States would enjoy all the attainable gains from free trade with Canada if it trades at the Canadian rate of transformation, which means it is producing the good in which it has a lower opportunity cost compared to Canada. Trading at the US rate of transformation would not result in all the attainable gains from trade. Specializing completely in the production of both goods or partially in the production of both goods would not result in all the attainable gains from trade, as there would still be a difference in the opportunity costs between the two countries.

Given a Two-Country and Two-Product World,the United States Would Enjoy