The correct answer is: D. All of these
International trade takes place when countries have different comparative advantages. A comparative advantage is a country’s ability to produce a good or service at a lower opportunity cost than another country. When countries have different comparative advantages, they can trade with each other and both countries will benefit.
If countries have equal costs, there is no comparative advantage and there will be no trade. If countries have absolute advantages, they can produce all goods at a lower cost than other countries. In this case, there is no need to trade and countries will produce all goods for themselves.
Therefore, international trade would not take place under any of the cost differences mentioned in the question.
Here is a more detailed explanation of each option:
- Equal costs: If countries have equal costs, there is no comparative advantage and there will be no trade. For example, let’s say that Country A and Country B both produce wheat and cloth. In this case, both countries can produce both goods at the same cost. There is no reason for Country A to trade wheat with Country B, and vice versa.
- Absolute advantages: If countries have absolute advantages, they can produce all goods at a lower cost than other countries. In this case, there is no need to trade and countries will produce all goods for themselves. For example, let’s say that Country A can produce wheat at a cost of $1 per bushel, and Country B can produce wheat at a cost of $2 per bushel. In this case, Country A will produce all of the wheat for both countries. There is no reason for Country B to trade wheat with Country A.
It is important to note that comparative advantage is not the same as absolute advantage. A country can have a comparative advantage in a good even if it does not have an absolute advantage in that good. For example, let’s say that Country A can produce wheat at a cost of $1 per bushel, and Country B can produce wheat at a cost of $0.50 per bushel. In this case, Country B has an absolute advantage in wheat production. However, Country A may still have a comparative advantage in wheat production if it has a lower opportunity cost of producing wheat than Country B. For example, let’s say that Country A can produce cloth at a cost of $2 per yard, and Country B can produce cloth at a cost of $1 per yard. In this case, Country A has a comparative advantage in cloth production, even though it does not have an absolute advantage in cloth production.