Country A has great expertise in the production of planes and produces a large quantity of...
Country A has great expertise in the production of planes and produces a large quantity of planes while country B has expertise in the production of automobiles and produces large quantities of cars. When the two countries trade planes for automobiles
both countries improve allocative efficiency because they can now consume a more desirable combination of goods and services (planes and cars) through trade.
only country B benefits because through trade they can acquire planes that are more valuable than automobiles.
Homework Answers
It has been stated that the country A has great expertise in the production of planes.
This implies that the country A has the comparative advantage in the production of planes.
Moreover, it has been stated that the country B has great expertise in the production of automobiles.
This implies that the country B has the comparative advantage in the production of automobiles.
When two countries have comparative advantage in the production of two separate goods and then trade with each other then both countries gain.
Their gain is in terms of improvement in allocative efficiency they experience which enables them to consume a more desirable combination of goods and services through trade.
Hence, the correct answer is the option (1).
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