Statement True/False Explanation 1 True Two countries can achieve gains from trade even if one of the countries has an absolute advantage in the production of all goods. All that is necessary is that each country have a comparative advantage in some good. 2 False No one can have a comparative advantage in everything. Comparative advantage reflects the opportunity cost of one good or activity in terms of another. If you have a comparative advantage in one thing, you must have a comparative disadvantage in something else. 3 False It is not true that if a trade is good for one person, it cannot be good for the other one. Trades can and do benefit both sides when based on comparative advantage. If both sides did not benefit, trades would never occur. 4 False To benefit both parties, the trade price must lie between the two opportunity costs. 5 False Trade that makes the country better off can harm certain individuals in the country. For example, suppose a country has a comparative advantage in producing wheat and a comparative disadvantage in producing cars. Exporting wheat and importing cars will benefit the nation as a whole, as it will be able to consume more of both goods. However, the introduction of trade will likely be harmful to domestic auto workers and manufacturers.

Two countries can gain from the trade if one has comparative advantage in a certain good and other has comparative advantage in other good. The trade will always occur when both parties involved in the trade benefits from it. It is not necessary that if a country has comparative advantage in certain good then it will have comparative disadvantage in other good.