Question

In the model of trade based on production possibilities frontiers, countries can gain from trade only if their pre-trade opportunity costs differ.

True

False

Answer 1

The answer is True.

True – Suppose there are two countries A and B producing two goods X and Y, if Country A has absolute advantage in production of both X and Y , i.e the opportunity cost of producing both the goods is less in country A then country B. Then country A would have no gain from trading. But suppose the opportunity cost of producing X is less in country A then B and that of Y is less in country B than A , then both country will join in trade and gain from it, as A will export X and import Y and country B vice versa.