Question

Suppose that Japan is more efficient in producing everything than North Korea. In terms of the concept of comparative advantage, which of the following would best characterize their economic relationship?

1. North Korea would not want to trade with Japan to prevent its industries from being destroyed by Japanese competition

2. North Korea would want to send workers to work in Japan

3. North Korea would benefit from trade but Japan would lose from trade

4. there would be trade between the two if pre-trade relative prices are different

5. there would be no gain from trade for Japan

Answer 1

As per the law of comparative advantage if one nation is more efficient in producing all goods than the other, both nations can still trade under conditions where each benefits.

For example, China has abundant textile while India has abundant labor. In such case China will import labor from India (as it is available at cheaper rates due to abundance in India) and export textile to India (as it can be sold at higher rates due to lack in India). This will maximize its efficiency in production.

Answer: 4. there would be trade between the two if pre-trade relative prices are different