Consider two countries Daria and Atlantis. Daria is a major producer o

QUESTION

Consider two countries Daria and Atlantis. Daria is a major producer of wheat and rice while Atlantis specializes in the production of fertilizers and manufacturing equipment.

Engaging in free trade benefits both countries since Daria is an agrarian nation and Atlantis lacks arable land. This follows the theory of comparative advantage, and we can say that engaging in free trade benefits all countries that participate in it. Which of the following is an inaccurate assumption on which this conclusion is based?

A. We have assumed a simple world in which there are only two countries.

B. We have assumed the prices of resources and exchange rates in the two countries are dynamic.

C. We have assumed there are barriers to the movement of resources from the production of one good to another within the same country.

D. We have assumed that agrarian nations do not specialize in producing fertilizers.

E. We have assumed diminishing returns to specialization.

ANSWER

A