Question

High transaction costs will tend to a. reduce the number of mutually beneficial exchanges. b. lead to more specialization in accordance with the law of comparative advantage. c. increase the total gains from trade. d. increase the number of mutually beneficial exchanges.

Answer 1

Answer: Option (a) is correct.

Explanation:

Transaction costs are considered as a barrier or obstacle to trade between the nations. High transaction costs are generally occured because of the geographical proximity. Geographical proximity refer as the distance between the two nations. The larger the distance between the two nations, the larger will be the transaction costs. Therefore, higher transaction costs directly affects the trade between the two countries because it will become expensive for the nation.

Hence, this will reduce the number of mutually beneficial exchanges.