Question

Assume that by devoting all of its resources to the production of X, nation Alpha can produce 40 units of X. By devoting all of its resources to Y, Alpha can produce 60Y. Comparable figures for nation Beta are 60X and 40Y. We can conclude that _________.a. there is no basis for mutually beneficial specialization and trade. b. Alpha should specialize in Y and Beta in X. c. Alpha should specialize in X and Beta in Y d. the terms of trade will be 3X equals 1Y.

Answer 1

Answer:

B. Alpha should specialize in Y and Beta in X

Explanation:

This is in line with the theory of absolute advantage postulated by Adam Smith where he was of the opinion that country should specialize in those commodities it can produce at the lower absolute cost than other countries. He added that trade is mutually beneficial if one nation has an absolute advantage in the production of one good and the other nation has absolute advantage in the production of the second good. Since alpha can produce more Y and beta can produce more X, they should each focus on producing those products they can produce more efficiently.