Gains from TradeSolutionA country has comparative advantage

Gains from Trade??

Solution

A country has comparative advantage in producing that good which it can produce at a lower opportunity cost compared to another country.

According to the law of comparative advantage, two countries will gain from trade if they specialize in and export that product in which they have respective comparative advantage. When countries trade accordint to this rule, both will gain from trade as long as the terms of trade (relative price) of a good lies between the respective opportunity costs of producing that good, by both countries.