CFA Practice Question

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CFA Practice Question

Which of the following is (are) true about the advantages of international trade?

I. It leads to lower prices for imported goods.
II. It leads to lower prices for exported goods.
III. It leads to an expansion of consumption possibilities.
IV. It leads to an expansion of the production possibility frontier.
A. I, II and III
B. I, II and IV
C. I, III and IV
Explanation: International trade takes advantage of the comparative advantages that the trading partners have in producing goods and services. This expands the production possibilities and hence, the consumption possibilities. Further, in the presence of exports, the supply of an exported good in the domestic market is lower than it would be otherwise. This causes a higher price for the exported good to prevail in the domestic market - hence, (II) is incorrect. The reverse occurs for imported goods, so (I) holds true.

User Contributed Comments 8

User Comment
alexix The question did not state the lower prices of export goods is for the domestic market.
keithinny How can imports prices be lower without export prices being lower also ? Imports for one country is an export for another.
anricus Supply and demand forces. There is less supply of the good which we are exporting and therefore price will go up. There is more suppy of the imported good and so price will go down!
Janey Also low price for exports is not an advantage. A country would want a high price for their exports.
malawyer this is ceteris paribus bs (hence, you must learn it that way for the exam). In the real world, a producer would have more output, more economies of scale, higher learning curve etc. which would DECREASE the price for goods that can also be exported, at least this is a POSSIBLE outcome. keep in mind, learning for the CFA is not to understand the real world but models.
shival What about the model about two countries with comparative advantage in producing cars for A and computers for B. So A wil producew only cars, and B will produce only computers. But from te other side A will become monopolist in selling cars and B in computers. So as monopolist they have incentive to rise prices on their products.
dan1987 II as a statement is correct it will lower export prices. However in the context of the question lower export prices are not an advantage. This is a general question if prices of imported good x (country A) are reduced then the price of good x exported (By Country B) must also have been reduced
dbalakos when you export a good which you produce cheaply you basically import the higher prices from abroad and when you import a good which you produce expensively you export your high prices. Price collusion in general
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