Question

Consider two countries Daria and Atlantis. Daria is a major producer of wheat and rice while Atlantis specializes in the production of fertilizers and manufacturing equipment. Engaging in free trade benefits both countries since Daria is an agrarian nation and Atlantis lacks arable land. This follows the theory of comparative advantage, and we can say that engaging in free trade benefits all countries that participate in it. Which of the following is an inaccurate assumption on which this conclusion is based?
A)We have assumed the prices of resources and exchange rates in the twocountries are dynamic.
B)We have assumed a simple world in which there are only two countries.
C)We have assumed that agrarian nations do not specialize in producingfertilizers.
D)We have assumed there are barriers to the movement of resources from theproduction of one good to another within the same country.
E)We have assumed diminishing returns to specialization

Answer 1

C






I think it would be

Answer 2

Answer:

B)We have assumed a simple world in which there are only two countries.

Explanation:

If the only countries in the world were Daria and Atlantis, then the assumption that all countries benefit from free trade would be correct. When other countries enter into the equation, not all of them may benefit from free trade, for example, if a third country XYZ produced both wheat and fertilizers, a free agreement would not necessarily be beneficial to them.