Refer to Table 16.1. Which of the following statements is correct?

A) There are potential gains from trade if: (1) Mexico specializes in the production of tomatoes, (2) Guatemala specializes in the production of beer, and (3) Mexico trades tomatoes to Guatemala for beer.
B) There are potential gains from trade if: (1) Mexico specializes in the production of beer, (2) Guatemala specializes in the production of tomatoes, and (3) Mexico trades beer to Guatemala for tomatoes.
C) There are no potential gains from trade because Mexico has an absolute advantage in the production of beer and tomatoes.
D) There are no potential gains from trade because Guatemala has an absolute advantage in the production of beer and tomatoes.

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Catherine Gaffrey · Accepted Answer

Final Answer : A, Explanation :  The concept of comparative advantage suggests that even if one country has an absolute advantage in the production of all goods, there can still be benefits from trade if each country specializes in the production of goods for which it has a comparative advantage. Thus, if Mexico is relatively more efficient at producing tomatoes and Guatemala at producing beer, both countries can benefit from specializing and trading, even if Mexico has an absolute advantage in both products.

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