Gains from Trade via Comparative Advantage

Steps:

• Identify opportunity costs: In M, 1Y costs 4X; in N, 1Y costs 2X (from PPF slopes).
• Compare trade rate: 1Y for 3X lies between 2X and 4X.
• Determine specialization: M produces Y (lower opp cost), N produces X.
• Assess gains: Both trade at terms better than autarky, increasing consumption.

Why A is correct:

• Terms of trade (3X per Y) exceed N's cost (2X) but below M's (4X), allowing mutual gains per comparative advantage theory.

Why the others are wrong:

• B: Both gain, not just M, as N trades Y for more X than its cost.
• C: M has comparative advantage in Y, N in X; trade exploits this for gains.
• D: Absolute advantage irrelevant; comparative advantage drives N's gains too.

Final answer: A