Q. Albania refused to engage in international trade for ideological reasons. To maximize its economic welfare it could choose to produce at which point in the diagram above? Suppose the PA/PB at point was equal to 1. Given this information, in which good (B or A) does Albania enjoy a comparative advantage? Now that the Cold War is over, Albania is interested in obtaining economic welfare increases from trade. The relevant international relative price is PA/PB = 2. Albania could thus choose to produce at which point (a, b, or c)? Given this additional information, in which good does Albania enjoy a comparative advantage?

Answers: Albania would prefer to produce at point a. Without reference to world terms of trade one can't establish Albania's comparative advantage. Afterwards when Albania find out that the relative price of A equals twice the price of B, it identify that it has a comparative advantage in A. Consequently Albania would produce at production point b.