Question

Two countries will have no incentive to trade in two goods, if

• A. The opportunity cost for both countries in producing two goods is same
• B. One country has absolute advantages in the production of both goods
• C. One country has comparative advantages in the production of both goods
• D. None of the above

Hint:

Trade occurs only when opportunity costs differ; identical opportunity costs eliminate all comparative advantages and trading gains.

Answer 1

The Correct Option is A

Step 1: Understanding the Concept:
David Ricardo's Law of Comparative Advantage dictates the fundamental basis and gains from international trade.

Step 2: Detailed Explanation:
Mutually beneficial international trade occurs when relative cost ratios (opportunity costs) of producing goods differ between nations.
If the opportunity cost (domestic rate of transformation) of producing two goods is identical in both nations, neither country has a comparative advantage, leaving no price differential or economic incentive to engage in international trade.

Step 3: Final Answer:
Hence, two countries have no incentive to trade if their opportunity costs are identical.