Comparative Advantage Enables Mutual Gains from Trade

Steps:

• Calculate opportunity costs: R's 1X costs 50/30=1.67Y (or 1Y costs 0.6X); S's 1X costs 25/20=1.25Y (or 1Y costs 0.8X).
• Determine comparative advantages: S has lower cost for X (1.25Y < 1.67Y), R for Y (0.6X < 0.8X).
• Specialization: S produces X, R produces Y, increasing combined output beyond autarky.
• Terms of trade (1X:1Y) lie between opportunity cost ratios (S's 1:1.25 to R's 1:1.67), allowing both gains.

Why A is correct:

• Per Ricardo's theory, trade benefits both when each specializes in its lower opportunity cost good, as total production rises and consumption possibilities expand.

Why the others are wrong:

• B: S gains from exporting X at better-than-autarky terms.
• C: Specialization and trade increase efficiency for both.
• D: R gains from exporting Y at better-than-autarky terms.

Final answer: A