Which of the following best describes an economy with a larger involvement in foreign trade?

• A. It will always have a trade surplus.
• B. It does not benefit from specialization.
• C. It is more likely to experience gains from comparative advantage.
• D. It is less affected by global price changes.

Answer: (C)

Verified step by step guidance

1. Step 1: Understand the concept of foreign trade in an economy. Foreign trade involves the exchange of goods and services between countries, allowing economies to specialize in producing goods where they have a comparative advantage.
2. Step 2: Recall the principle of comparative advantage, which states that countries benefit by specializing in producing goods for which they have a lower opportunity cost and then trading with others. This specialization and trade lead to overall gains in efficiency and welfare.
3. Step 3: Analyze the options given: a trade surplus is not guaranteed by larger foreign trade involvement, as trade balances depend on exports and imports; specialization is actually encouraged by foreign trade, so the statement that it does not benefit from specialization is incorrect.
4. Step 4: Consider the impact of global price changes. An economy more involved in foreign trade is generally more exposed to global price fluctuations, so it is not less affected by them.
5. Step 5: Conclude that the best description of an economy with larger involvement in foreign trade is that it is more likely to experience gains from comparative advantage, as this aligns with fundamental economic theory on trade benefits.