Problems and Applications Q9 Indicate whether each of the following statements is true or false. Statement True False 1. There can be no gains from trade between two countries if one of them has an absolute advantage in the production of all goods. 2. Comparative advantage determines the gains from specialization and trade. 3. If a certain trade is good for one country, it can't be good for the other country. 4. Two individuals can benefit from specialization and trade if they agree upon a price that lies between their opportunity costs of producing the good. 5. When a country opens to trade, people working in industries producing goods that the country exports are harmed by the trade.

1. FALSE

There can still be gains from trade if one country has an Absolute advantage in the production of all goods because having absolute advantage does not mean that it has comparative advantage. If they did have comparative advantage in all goods then there would be no gain.

2. TRUE

As shown in the explanation above, gains from trade are determined by comparative advantage. If a country has comparative advantage in a good, it can gain from trading for a good it does not have comparative advantage in.

3. FALSE

Trade can and should be mutually beneficial to both countries.

4. TRUE

If both parties agree to a price that lies between their opportunity costs, they can make gains because they would be making more than their opportunity costs.

5. FALSE

The country has opened up to trade which means that the good they export now has a larger market to sell to. This will be beneficial to the people in the exporting industry as they will sell more and thus make more money.

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