Illustrate and explain, for each statement below, why the statement is either TR
ID: 1215196 • Letter: I
Question
Illustrate and explain, for each statement below, why the statement is either TRUE or FALSE. Assume a two-commodity world in each case.
(a) “If a country has an absolutely fixed production pattern, i.e., resources used in each industry are completely specific to their respective industry, then this country cannot experience any welfare gain when moving from autarky to free trade.” This statement is false because if country 1 makes product A with materials found only in their country and country 2 makes product B with materials only found in their country, then they will not be able to consume the opposite country’s product without trading.
(b) “It is possible that, even if two countries have identical production- possibilities frontiers, trade between the countries can enhance the well-being of each country, in comparison with well-being under autarky.”
Explanation / Answer
(a)FALSE
This statement is false because if country 1 makes product A with materials found only in their country and country 2 makes product B with materials only found in their country, then they will not be able to consume the other country’s product without trading.
(b)FALSE
This statement is false because If PPF gradients are identical, then no country has a comparative advantage, and opportunity cost ratios are identical. In this case, international trade does not confer any advantage.