Impact of Trade on Economies of Countries A and B

Medium International Economics International Trade

Consider the following scenario involving two countries: Country A and Country B. Country A produces both wine and cloth, while Country B specializes in producing wine only. Due to differences in relative costs, Country A has a comparative advantage in producing cloth. If both countries decide to trade, which of the following statements correctly describes the potential impact of this trade on the economies of Country A and Country B?

Country A will only export cloth, while Country B will export wine and import cloth.

Both countries will become more self-sufficient by trading with each other.

Trade may allow Country A to increase its overall production possibilities, while Country B benefits from consuming more diverse goods.

Hint

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