Gains from trade can be measured by:

• A. the reduction in opportunity cost for both trading partners
• B. the increase in total consumption possibilities beyond the production possibilities frontier
• C. the absolute advantage one country has over another
• D. the difference between imports and exports

Answer: (B)

Verified step by step guidance

1. Step 1: Understand the concept of gains from trade. Gains from trade occur when countries or individuals specialize in producing goods where they have a comparative advantage and then trade, allowing them to consume more than they could produce on their own.
2. Step 2: Recall the Production Possibilities Frontier (PPF), which shows the maximum combinations of two goods that a country can produce given its resources and technology. Without trade, consumption is limited to points on or inside the PPF.
3. Step 3: Recognize that trade allows consumption beyond the PPF because countries can specialize and exchange goods, effectively increasing total consumption possibilities.
4. Step 4: Note that gains from trade are not measured by absolute advantage (which is about who can produce more efficiently) or by the difference between imports and exports, but by the increase in consumption possibilities.
5. Step 5: Conclude that the correct measure of gains from trade is the increase in total consumption possibilities beyond the production possibilities frontier, reflecting the benefits of specialization and exchange.