CFA Practice Question

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CFA Practice Question

A nation can gain from international trade when ______

I. the relative prices of the nation's products differ from those of other countries.
II. it imports goods for which it is a high-opportunity cost producer while exporting goods it produces at a low opportunity cost.
A. I is false and II is true.
B. I is true and II is false.
C. Both statements are true.
Explanation: Both of these statements are true. The law of comparative advantage implies that trading partners can be made better off if each specializes in the production of goods for which it is a low opportunity-cost producer and trades for those goods for which it is a high opportunity cost producer. This situation will lead to a minimization of costs and a maximization of output. There must be differences in the relative prices of products across countries in order for this comparative advantage to be realized. This is because the price of a good reflects its production costs. If all production costs were equal across countries then there would be no incentive to trade, since each country could produce with equal efficiency.

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