By adjusting the model of comparative advantage to include transportation costs along with production costs we would expect ?
Correct answer: C. The volume of trade to be less than when there are no transportation costs
- A. The prices of trade goods to be lower than when there are no transportation costs
- B. specialization to stop when the production costs of the trading partners equalize
- C. The volume of trade to be less than when there are no transportation costs
- D. The gains from trade to be greater than when there are no transportation costs
Explanation
Transportation costs raise the effective cost of trading and make some potential exchanges unprofitable, so the volume of trade falls compared with a zero-transport-cost case. They do not increase the gains from trade or necessarily make traded-goods prices lower.
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